Argosy Minerals Annual Report 2014

Plain-text annual report

Allergy Therapeutics plc Annual Report & Accounts 2014 www.allergytherapeutics.com www.pollinex.com Contents Mission Statement Strategic Report Our Business 2014 Highlights Chairman’s Statement Current Market Overview Our Products Our Performance Chief Executive Officer’s Review Key Performance Indicators Research & Development Report Financial Review Principal Risks and Uncertainties Our Governance Board of Directors Corporate Governance Report of the Directors Directors’ Remuneration Report Nominations Committee Report Financial Statements Independent Auditor’s Report to the Members of Allergy Therapeutics plc (Group) Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Cash Flow Statement Notes to the Financial Statements Independent Auditor’s Report to the Members of Allergy Therapeutics PLC (Company) Company Balance Sheet Notes to the Company Balance Sheet Company Information Shareholder Information Advisers 2 2 6 10 14 18 22 26 30 34 38 44 48 54 60 64 65 66 67 68 70 71 109 110 111 116 116 © Allergy Therapeutics plc www.allergytherapeutics.com 01 Allergy Therapeutics PLC Strategic Report Allergy Therapeutics is an AIM listed speciality 2014 Highlights pharmaceutical company. Allergy Therapeutics is European-based and focused on discounts) to £46.8m (2013: £41.5m) the treatment and prevention of allergy with aluminium • 7% increase in gross revenue (excluding rebate and free products. discounts) at constant currency* to £44.3m (2013: £41.5m) • 13% increase in gross revenue (excluding rebate and Mission Statement • • • 7% increase in revenue to £42.0m (2013: £39.3m) Gross profit increased 10% to £30.0m (2013: £27.3m) Increased investment in clinical studies to £1.5m (2013: £0.3m) To create a sustainable, fast-growing and profitable global • Operating profit increased 71% to £1.2m (2013: £0.7m) speciality pharmaceutical business with a substantial franchise in the allergy sector by developing innovative, patented, registered therapies for both the treatment and prevention of allergy-related conditions. • • • • Cash balance improved to £2.0m (2013: £1.3m) Competitive position in our key European markets strengthened with average market share increasing by 9% European roll out of probiotic products Appointment of Professor Tim Higenbottam as Research and Development Director • Canadian Health Authority approved the submission of the Clinical Trial Application (CTA) for environmental challenge chamber study * Constant currency uses prior year weighted average exchange rates to translate current year foreign currency denominated revenue to give a year on year comparison excluding the effects of foreign exchange movements. See table in the Financial Review for an analysis of revenue on page 30. 04 © Allergy Therapeutics plcwww.allergytherapeutics.comChairman’s Statement Chairman’s Statement I am pleased to report that this is the fifth consecutive year the Company has reported an operating profit, with a 71% increase to £1.2 million (2013: £0.7 million). Furthermore, the Company’s gross revenue increased by 13%, excluding the impact of rebates and discounts, to £46.8 million (2013: £41.5 million) in markets that have shown improvement over the year, but remain challenging (see revenue table on page 30). The Company’s competitive position in European markets continued to strengthen with market share increasing by 9% with consistent improvements across our key European market. In addition to the strong financial results, this year has seen the Company maintaining its positive momentum across all its activities. Professor Tim Higenbottam has joined the Company as Research and Development Director and is strengthening our team of pharmaceutical experts to enable the Company to continue to meet the challenges of modern medicine development. The Research and Development expenditure increased during the year to support the completion of the Phase II clinical study for the Pollinex Quattro® Birch under the TAV regulatory framework in Germany. Regulatory progress in the US is still on going and the positive changes seen in the US immunotherapy market confirm our confidence to continue to explore a range of options to exploit this commercial opportunity. We have successfully launched Acarovac, a modified-allergen product developed for the treatment of perennial mite allergy in Spain and added Syngut to our probiotic range of products. Our scientific development department published an important paper detailing the results of short course immunotherapy efficacy, using Tyrosine plus MPL, in reducing ragweed pollen allergy in The Journal of Allergy and Clinical Immunology. The manufacturing, clinical and pharmacovigilance departments successfully passed three stringent health authority inspections in the UK, Austria and Germany, respectively, which clearly demonstrates that the Company works to high regulatory standards. I would like to thank all our employees for their important contribution to a successful year that continues to demonstrate the Company’s potential based on sound financial and business activity continuing to deliver shareholder value. Peter Jensen Chairman 19 September 2014 08 © Allergy Therapeutics plcwww.allergytherapeutics.com Current Market Overview Current Market Overview We have a strong presence in Europe with our own established operations in important markets including Germany, Italy, Spain, Austria, Switzerland, Netherlands and the United Kingdom. In markets where we do not have a direct presence, we often make our products available through partners. The most important distributor markets for the Group are Canada, the Czech and Slovak Republics, South Korea and more recently, Greece and the Baltics. Germany is the Group’s main market, generating approximately 61% of the Group’s revenue in the 12 months ending 30 June 2014. The percentage of revenue derived from each country is detailed below: Germany (61%) Germany is the largest allergy immunotherapy market in Europe, with annual sales of over €320 million. In recent years, the market has been affected by the austerity measures introduced by the German government in 2010 and by the new regulatory environment for allergen therapies. Germany remains a key focus for the Group and we continue to strengthen the Group’s approach to marketing its products which has been instrumental to an increase in our market share. Italy (11%) The total Italian allergy immunotherapy market is estimated to be worth €50 million in sales per year. The market is falling because patients have been impacted by adverse economic conditions affecting their ability to pay for vaccines. The Italian immunotherapy market is dominated by sublingual products. However, despite these challenges, we believe that there remains a significant opportunity to continue to grow our business in this important market. Austria (6%) Austria is an established market with total market sales of approximately €18 million per year and our own operation is performing well by outgrowing the market. Switzerland (5%) The allergy vaccine market in Switzerland is well established, and is worth approximately €14 million per annum. Further alignment to EU regulations for specific immunotherapy (SIT) products and diagnostics has the potential to generate new opportunities. Spain (5%) Total market sales in Spain are estimated to be €60 million per annum, with low single-digit growth during the past year. Growth in this market has been impacted by the country’s economic slowdown; however, it continues to be a large valuable market, with approximately 150,000 patients a year estimated to receive immunotherapy. Injectable immunotherapy products of modified allergen remain the treatment of choice for Spanish physicians in this treatment category. United Kingdom (3%) The UK is an important market due to its potential for future growth for the Group. Whilst currently, there is limited use of allergy vaccines in the UK, there is potential for this to change and the Group has focused on marketing to the medical community to promote greater awareness of more suitable treatment options. Pollinex is the only pollen SCIT (subcutaneous immunotherapy) product currently registered in the UK. The Netherlands (3%) The total market size in The Netherlands is around €30 million a year. Insurance companies decided in January 2014 that they will reimburse only registered products. This new policy will take effect from January 2015 and is going to impact approximately 50% of the products currently in the market. This does not impact our products as we already have Pollinex registrations in this market. Allergy Therapeutics is the only allergy company showing growth in the Dutch market with year on year growth in revenue of 21%. 12 © Allergy Therapeutics plcwww.allergytherapeutics.comEmerging Markets In 2012, we set up a new marketing operation in Argentina and launched our first products in Argentina, Venezuela, Colombia and Chile. Sales have been slow to date due to regulatory hurdles in these Latin American markets. However, this region is still seen as having promising potential. Recent Developments in US Market Over the last financial year a significant new potential market opportunity has arisen in the US for allergy vaccine products. In December 2013 and January 2014, the Food and Drug Administration (FDA) held two Allergenic Products Advisory Committee (APAC) review meetings where three new sublingual immunotherapy (SLIT) products were recommended for licence approval in the US. All three products were subsequently licensed in 2014. These are the first allergy vaccine products to be formally approved by the FDA in the US, opening the door for subcutaneous immunotherapy (SCIT) products (e.g. AT’s Pollinex Quattro product) to be licensed. SCIT products offer a number of advantages over the recently licensed SLIT products and are more aligned to current allergist immunotherapy practice in the US. Allergy affects 15-40% of the US population (i.e. circa 50m), so the total market size for allergy vaccine products is potentially large. We continue to review and make progress towards registration for our products in this important market, the detail of which is covered within the Chief Executive Officer’s Review on pages 18-19. For the purposes of the segmental reporting analysis, Central Europe represents the markets of Germany, Austria, Netherlands and Switzerland, and Southern Europe represents Spain Italy and Portugal. The Other segment represents revenues through distributors and agents in other worldwide markets including Canada, Czech and Slovak Republics, South Korea and Latin America. Revenue by Country Germany – 61% Italy – 11% Switzerland – 5% Austria – 6% Spain – 5% Czech Republic & Slovakia – 3% Canada – 1% The Netherlands – 3% UK & Export market – 3% South Korea – 1% Other – 1% 13 © Allergy Therapeutics plcwww.allergytherapeutics.comOur Products Our Products The Group sells a wide range of aluminium free allergy vaccines and diagnostics. The majority of our revenue arises from sales of allergy vaccines. We sell both injectable and sublingual formats. The most commonly prescribed are those for the treatment of pollen-related allergies, particularly for allergies to grasses, weeds and trees. Our vaccines trade under various brand names depending on the market, e.g. Pollinex Quattro, Polligoid, TA Gräser Top. Our extensive range of well characterised diagnostics include 94 diagnostics in Germany with marketing authorisations and specialised allergens for other markets like Blomia tropicalis for Latin America. According to the current opinion of expert immunologists, IgE mediated allergies (type one allergies) are due to deregulation of the T helper lymphocyte (TH) cell. Whereas healthy people develop tolerance to allergens, allergy sufferers have a TH2-dominated immune response with increased IgE and corresponding clinical symptoms. This deregulation of the immune system can be counteracted efficiently using specific immunotherapy (SIT). By administering high doses of allergen in a controlled fashion, the balance between TH1 and TH2 response to the allergen can be restored. Since SIT was first carried out successfully by Leonard Noon in 1911, it has become established as the only therapy addressing the cause of type one allergies. Pollinex Quattro, launched in 1999, heralded a transformation in immunotherapy by introducing allergy vaccination with only four injections per course. The short treatment period is due to the use of L-tyrosine absorbed allergoids, an improved extract allergen that has been modified in order to lower its allergenicity while keeping its immunogenicity, and the innovative adjuvant monophosphoryl-lipid A (MPL). An adjuvant is a substance which improves the immune response to an antigen or allergen. MPL is derived from a lipopolysaccharide (LPS) which is obtained from the cell wall of Salmonella Minnesota R595 using a process of extraction, purification and detoxification. As a vaccine adjuvant, MPL has been used for many years. Vaccines containing MPL have been evaluated in various indications such as cervical cancer and malaria at GlaxoSmithKline. Two vaccines with an adjuvant system containing MPL - Fendrix, a hepatitis B vaccine and Cervarix, a HPV vaccine to protect against cervical cancer - have received broad approval in Europe, the US, Japan and Canada. These modern, successful vaccines are already widely used. The adjuvant effect of MPL in specific immunotherapy (SIT) has been documented in numerous studies and is seen in its essential role of promoting the switch from a TH2-directed immune response (with IgE induction) to a TH1-directed immune response. Our sublingual product is Oralvac Compact. Its dosing schedule allows for a more rapid and simple escalation of dosage making treatment more convenient for patients and doctors. The treatment can be taken by the patient in their own homes and is raspberry flavoured for improved patient compliance. Wasp and Bee treatment is provided by our freeze dried Venomil product which can be used following a ‘Rush’ dosing regimen. Probiotics In June 2012, we launched three new Probiotic products (Kallergen-Th, ATI Prob and Pollagen) across Spain, Portugal and Italy. Since then we have included Austria and Germany. The products contain specific combinations of Lactobacilli and Bifidobacteria. Acarovac Plus Acarovac Plus was launched in Spain in March 2013 and is a novel tyrosine-adsorbed, modified-allergen product developed for treatment of perennial mite allergy. The product has been standardised to meet a dose regime consistent with “one bottle” convenience. We have completed clinical evaluation to demonstrate excellent patient tolerability and serological analyses consistent with a favourable shift in Th1/Th2 balance compared with an unmodified version of the product. Penicillin Diagnostics DAP is a product for exclusive use in the diagnosis of type I, or immediate hypersensitivity to benzylpenicillin and related antibiotics (betalactams) by means of cutaneous tests (prick and intradermal). Allergic reactions to betalactams are the most common cause of severe adverse drug reactions and there is an increasing prevalence in the population. DAP is supplied to Italy, UK and The Netherlands. 16 © Allergy Therapeutics plcwww.allergytherapeutics.com17 © Allergy Therapeutics plcwww.allergytherapeutics.comCEO’s Review Chief Executive Officer’s Review The core business of the Company, being mainly concentrated in the European Community, continued to show improvement in market penetration and revenue during the year resulting in an increase of 13% (7% at a constant currency basis*), excluding the impact of rebates and discounts, to £46.8 million (2013: £41.5 million). This increase in sales strengthens the Company’s ability to build its market share, which increased by 9% in the territories in which we operate. The Company continues to be one of the top performers in its market segment in Europe. Bencard Allergy, our German subsidiary, is now continually outperforming the market with an increase of 11% in gross sales at constant currency to £28.0 million (2013: £25.3 million). Sales in the rest of central Europe showed strong growth with an increase of 7% at constant currency in the year. Southern Europe, despite a declining market, grew by 10% at constant currency. In contrast, Latin America is still experiencing regulatory hurdles and sales were minimal during the year. This is the fifth year of reporting an operating profit which grew to £1.2 million (2013: £0.7 million) in spite of a significant investment in clinical studies during the year. Overall, it has been a busy year with continued positive momentum. In the early part of the year we launched a new allergoid vaccine for mites in Spain, Acarovac, which has been well received. The registration of dossiers continues to be very active. The clinical trials the Company has undertaken recently have been completed and there has been continued progress on the other side of the Atlantic with the FDA and the Canadian Health authorities. The Company’s team of pharmaceutical experts has been strengthened during the year with the recruitment of a new Director of Research and Development, an International Medical Director, a pharmacovigilance expert, an additional qualified person and a new regulatory manager. These appointments over the year greatly strengthen the Company’s ability to meet the challenges of modern medicine development. The positive recommendations of the Food and Drug Administration (FDA) for several sublingual vaccines have resulted in three products being rolled out to the market. This change to the market reinforces our confidence in the North American opportunity. Our discussions over the year with the FDA and the Canadian Health authorities have been positive. We are planning a G304 phase III study involving two clinical sites, one in the USA and one in Canada, involving 600 patients, who will use multiple environmental exposure chambers allowing for a controlled allergen exposure to study the response to the MATA MPL, Grass MATA and a placebo. The Phase II clinical study for Pollinex Quattro Birch under the Therapieallergene-Verordnung (TAV) regulatory framework to compare the difference between four individual regimes has been completed. The study was conducted in Germany, Austria and Poland and met its primary end point, demonstrating a dose response and remarkable freedom from side effects. The Company is now using the results of the study to plan its remaining studies under the TAV ordinance. The probiotic range was increased during the year with the addition of Syngut, a probiotic specifically designed for food intolerance launched in September 2013 in Italy and Spain and rolled out to Austria, Germany and Portugal earlier this year. The Company currently holds licences in a number of European countries for diagnostic tests, with 96 tests registered in Germany and sees opportunities to increase the number of markets it globally supplies. This has been a prolific year for our scientific development department, with three peer reviewed scientific papers published, and 12 posters accepted at the EAACI congress in Denmark in early June. One published paper highlighted the advantages of L-Tyrosine as an alternative naturally occurring biodegradable alternative to aluminium1. The other papers focused on Probiotics2 and Acarovac plus3. 20 © Allergy Therapeutics plcwww.allergytherapeutics.comOutlook The European allergy market continues to face a number of challenges, but with the continued momentum across the Company’s activities, the outlook is positive and we expect to continue to improve our market share into the next year whilst also showing continued momentum in the other areas that I have reported upon. The Company expects to continue to consolidate its position in the European markets as well as progressing its clinical development program within the TAV framework in Germany. Finally, we are very excited by the opportunity in the US market, and in making the transformational opportunity happen by developing an agreed roadmap to registering MATA MPL Grass in the US and we continue to explore a range of options to exploit this commercial opportunity. Manuel Llobet CEO 19 September 2014 1. Aluminium in allergen-specific subcutaneous immunotherapy- a German perspective. Kramer MF, Heath MD. Vaccine. 2014 Jul 16;32(33):4140-8. 2. Probiotics in the treatment of chronic rhinoconjunctivitis and chronic rhinosinusitis. Kramer MF, Heath MD. J Allergy (Cairo). 2014;2014:983635. * Constant currency uses prior year weighted average exchange rates to translate 3. A novel and well tolerated mite allergoid subcutaneous immunotherapy: current year foreign currency denominated revenue to give a year on year evidence of clinical and immunologic efficacy. Roger, A; Depreux, M; Jurgens, comparison excluding the effects of foreign exchange movements. See Y; Heath, MD; Garcia, G and Skinner MA. Immunity, Inflammation and Disease, table in the Financial Review for an analysis of revenue on page 30. Volume 2, Issue 2, pages 92–98, August 2014. 21 © Allergy Therapeutics plcwww.allergytherapeutics.comKey Performance Indicators Key Performance Indicators Strategic objective Maximise revenue KPI Revenue at constant exchange rate Definition Total revenue measured at a constant foreign exchange rate Strategic objective Maximise funds available from operational activities for investment in R&D and other value adding projects KPI EBITDA excluding R&D Definition Profit before interest, tax, depreciation, amortisation and research and development expenditure Strategic objective Maximise the number of countries into which we sell our products KPI Number of countries in which we operate Definition Countries in which we have a distributor, agent or direct sales force 24 £m 41.0 40.5 40.0 39.5 39.0 38.5 £m 6 5 4 3 2 1 0 s e i r t n u o c f o . o N 20 15 10 Revenue at Constant Exchange Rate 2012 2013 2014 *GBP: EUR exchange rate 1.20 EBITDA Excluding R & D 2012 2013 2014 Number of Countries in Which We Operate 2012 2013 2014 © Allergy Therapeutics plcwww.allergytherapeutics.com 25 © Allergy Therapeutics plcwww.allergytherapeutics.comResearch and Development Report Research and Development Report This year development activities have been focussed on our highly popular European Pollinex Quattro Vaccines and the MATA MPL Grass Vaccine for the US. These vaccines offer the patient both an ultra-short course of subcutaneous injections (4 in 3 weeks) and reduction in use of symptomatic therapy. European Clinical Development of Subcutaneous Immunotherapies (SCIT) In September, the Pollinex Quattro Birch dose ranging study was started using a conjunctival provocation test (CPT) to determine a dose response for four different doses of vaccine including our current commercial dose. The study design had been approved by the Paul Ehrlich Institute (PEI), the agency responsible for authorising biological products in Germany. The Phase II clinical study for the Pollinex Quattro Birch under the Therapieallergene-Verordnung (TAV) regulatory framework to compare the difference between four individual regimes has been completed (The TAV is the process by which immunotherapy, currently supplied as named patient prescription medication, will be licenced). The study was conducted in Germany, Austria and Poland with 35 patients per treatment arm and met its primary end point, demonstrating a dose response and remarkable freedom from side effects. The group is now using the results of the study to plan its remaining studies under the TAV ordinance. The US Clinical Development of SCIT In June 2014, a submission to the FDA’s Center for Biologics Evaluation and Research (CBER) was made to support the MATA MPL 0.5ml vaccine for Grass allergy. This product has the same allergen constituents and strength as Pollinex Quattro. Plans are being made for a trial involving patients with Grass allergy who will be recruited out of season and will be studied for their sensitivity to grass pollen before and after treatment. The proposal is to study over 600 patients in three separate locations in US and Canada. The study protocol has been submitted to the CBER along with the statistical analysis plan. 28 © Allergy Therapeutics plcwww.allergytherapeutics.com29 © Allergy Therapeutics plcwww.allergytherapeutics.comFinancial Review Financial Review The following section should be read in conjunction with the financial statements and related notes on pages 64 to 115. Overview The results for the twelve months to 30 June 2014 demonstrate not just continuing profitability, but an improvement in performance despite difficult market conditions and an increased investment in clinical studies, with an operating profit of £1.2 million (2013: £0.7 million). Operating profit includes a credit of £0.7 million relating to the fair valuation of forward currency exchange contracts (2013: charge £0.8 million) and a credit of £0.5 million in relation to changes in inventory standard costs. However, during the year investment in clinical studies increased to £1.5 million (2013: £0.3 million); operating profit before this investment has increased to £2.7 million from £1.0 million for 2013. Revenue Despite weak allergy vaccine markets in Europe, revenue at constant currency*, excluding the impact of rebates and discounts, was 7% better at £44.3 million (2013: £41.5 million). This can be seen in the table below: 2014 Germany £m 25.8 3.8 29.6 (1.6) 28.0 25.8 (1.5) 24.3 2014 Other £m 16.2 1.0 17.2 (0.9) 16.3 16.2 (0.7) 15.5 2014 Total £m 42.0 4.8 46.8 (2.5) 44.3 42.0 (2.2) 39.8 2013 Germany £m 23.6 1.7 25.3 2013 Other £m 15.7 0.5 16.2 2013 Total £m 39.3 2.2 41.5 25.3 16.2 41.5 23.6 15.7 39.3 23.6 15.7 39.3 Revenue Add rebates and discounts Gross revenue Adjustment to retranslate at prior year foreign exchange rate Gross revenue at constant currency Revenue Adjustment to retranslate at prior year foreign exchange rate Revenue at constant currency * Constant currency uses prior year weighted average exchange rates to translate current year foreign currency denominated revenue to give a year on year comparison excluding the effects of foreign exchange movements. With a stronger EUR:GBP average exchange rate during the year compared to the prior year, revenue increased by 7% to £42.0 million (2013: £39.3 million). The average EUR:GBP exchange rate in the year was 1.17 compared to 1.24 in the previous year; the stronger Euro positively impacted revenue by £2.2 million. The Group has continued to grow its revenue in markets outside Germany, and to reduce its reliance on the German market, with 61% of revenue in Germany this year compared to 73% in 2009. The key flagship product Pollinex Quattro, which accounts for 51% of sales, grew very well in the year at a constant currency growth rate of 11.3%. In addition to the sale of allergy vaccines, the Group has continued to look to increase its revenue from other products. Total sales from other products contributed £0.7 million for the year ended 30 June 2014 (2013: £0.7 million); the prior year included £0.2 million sales of Anapen until the product was withdrawn from the market during 2013. Revenue in Germany grew well in the year with gross revenue (before rebates and discounts) at constant currency increasing to £28.0 million (2013: £25.3 million); an increase of 11%. During the year, the Group was subject to the full rebate charge in Germany, whereas for the first half of the prior financial year, the group benefited from an exemption to the increased rate. 32 © Allergy Therapeutics plcwww.allergytherapeutics.comThe European Commission investigation into whether the exemption from the increase in rebates in Germany constitutes state aid is on-going. If it is eventually concluded that the exemptions constitute state aid, then all unlawful aid may have to be repaid (please refer to Note 29). The full rebate charge in H1 was 16% of sales, reducing to 6% in January 2014, before finally being agreed at a new on-going level of 7% in April 2014. In Spain and Italy, sales at constant currency increased by 10%, which was a strong result given the weak market during the year. Similarly, Austria showed strong growth in sales of 21% in the year at constant currency. Sales in the Latin American market were lower than planned for the year owing to a number of registration delays. Gross Profit Despite the increased sales, tight management of manufacturing overheads plus the benefit of changing the method of allocating overheads to intermediate products (generating a gain through cost of goods of £0.5 million), helped maintain cost of sales at the prior year’s level of £12.0 million (2013: £12.0 million). This, together with the revenue increase of £2.7 million increased the gross profit percentage by 1.9% points, to 71.5%, leading to a gross margin of £30.0 million (2013: £27.3 million). For a full explanation of the change to standard costs refer to page 82 (sources of estimation uncertainty (e)). Operating Expenses Total overheads are £2.2 million higher against the prior year at £28.9 million (2013: £26.7 million). Investments in supporting the sales and marketing infrastructure and the stronger Euro increased distribution costs, which are mainly European sales and marketing costs, to £17.9 million (2013: £16.3 million). Administration expenses include a credit relating to the fair valuation of foreign exchange hedges, generating an asset at the year end of £0.3 million. At the prior year end the fair valuation generated a liability; together these created a gain in the year of £0.7 million (2013: loss £0.8 million). The dose ranging study for Pollinex Quattro Birch continued during the year and was the main factor behind the increase in R&D costs to £3.0 million (2013: £2.5 million). Tax The tax charge in the year relates mainly to the Italian subsidiary. The recognition of a deferred tax asset in the prior year generated the tax credit of £0.1 million. This credit offset tax charges in some of the overseas subsidiaries. Balance Sheet With the major capital investment programme now complete and a lower maintenance level of spend now required, property, plant and equipment has fallen from £7.3 million to £7.0 million as the depreciation charge for the period is higher than new equipment purchases. In the prior year a review of the expected useful lives of all assets was conducted, resulting in an extension of some asset lives, generating a reduction in the charge to the income statement of £0.5 million in that period compared to the preceding year. Goodwill has reduced to £2.5 million (2013: £2.6 million) as a result of small foreign exchange rate movements, whilst other intangible assets have fallen by £0.1 million as a result of amortisation. Total current assets excluding cash have decreased by £1.0 million to £12.2 million (2013: £13.2 million). This is mainly due to a decrease in debtors as a result of the collection of rebate refunds in Germany, improved cash collection in Italy and the collection of the second milestone payment from the appointment of a new distributor in the prior year in Canada. Retirement benefit obligations, which relate solely to the German pension scheme, increased to £6.4 million (2013: £6.2 million). The increase in the liability was driven by a fall in German bond yields at the year-end compared to the previous year. Net cash generated by operations remained positive, with a reported inflow of £2.3 million (2013: £3.0 million). 33 © Allergy Therapeutics plcwww.allergytherapeutics.comFinancing The Group had no debt on its balance sheet at the close of the financial year other than the convertible loan liability of £49,000. The annual overdraft had been fully repaid in November 2013 and has been renewed for a further 12 months to cover the seasonal funding requirements over the summer of 2014. The Directors believe that the Group will have adequate facilities for the future and accordingly they continue to adopt the going concern basis in preparing the full year results. Ian Postlethwaite Finance Director 19 September 2014 Principal Risks and Uncertainties Principal Risks and Uncertainties The Board has overall responsibility for the Group’s system of risk management. In common with many pharmaceutical companies the Group faces a number of risks and uncertainties. Internal controls are in place to help identify, manage and mitigate these risks. The main risks have been identified as follows: Commercially successful products risk Continued development of viable new products and their successful registration and marketing is key to the success of the Group and is a costly and lengthy process. Rationale for new product development may indicate potential; however following significant investment there is no guarantee that a product will be successful. Two key opportunities for the Group are developing and commercialising Pollinex Grass in the US and the PEI market authorisation for Pollinex Quattro Grass in Germany. Product liability risk Despite extensive product testing prior to market launch, products may produce unanticipated adverse side effects that may hinder their marketability. The Group may be insufficiently covered for any potential litigation which in some cases can potentially be open- ended. The Group’s manufacturing facilities and those of some of its suppliers are subject to regulatory requirements and there is a risk that such facilities may not comply with such requirements. The Group maintains product liability insurance and ensures systems and processes relating to the manufacture of its products are compliant and regularly reviewed. It has a Pharmacovigilance team in place to monitor and address any safety issues arising. Intellectual property risk Group patents may be challenged at any time and any unsuccessful defence may cause the Group to lose protection for its products and subsequently affect further development and sales. The Group is reliant on some intellectual property owned by external stakeholders that, if lost, could hinder the commercialisation of some of it products. The Group has internal and external patent experts. Internal controls are in place to avoid disclosure of patentable material and to protect existing patents. Arrangements are also in place to notify the Group of any infringements of our intellectual property which it would defend robustly. Economic risks A high level of risk is attached to the research, development and commercialisation of innovative drugs. The Group ensures that business cases are scrutinised before Board approval and that any increases in costs are justified. Key suppliers may be unable to execute contractual requirements that hamper product development and/or the route to markets, but the Group maintains appropriate measures to protect its supply chains. The Group may be unable to attract partners or licensees on favourable terms or recruit the right staff to help develop and market its products. Approximately 61% (2013: 60%) of Group sales are made in Germany and therefore Group results are sensitive to German legislation and government policies, and performance of the German market. To mitigate this risk, the Group intends to expand its revenue outside Germany. Pharmaceutical products are subject to far greater controls on price in certain markets than other products in the marketplace. Some governments intervene directly in setting price levels and rebates paid into public sick funds, especially with an increasing aged population in developed countries. The Group cannot accurately predict when, where and how such controls and restrictions may be altered, either to its benefit or detriment, but it does conduct regular reviews of pricing and reimbursement levels and assessments of healthcare reforms on pricing. Financial risks Adequate funding may not be available to the Group, either through reserves or external partners for the advancement of clinical trials, manufacturing and marketing. Failure to obtain further funding may lead to postponement or cancellation of programmes. The Board actively reviews the financial requirements of the Group on a regular basis in order to ensure that adequate funding is available. 36 © Allergy Therapeutics plcwww.allergytherapeutics.comA majority of the Group’s sales are denominated in Euros whilst the manufacturing and most corporate administration costs are in the UK and therefore the Group is exposed to volatility in exchange rate fluctuations. The Group monitors exchange rates regularly and implements hedges to mitigate such risks. Note 24 in the Notes to the Financial Statements gives details of the Group’s objectives and policies for risk management of financial instruments. Clinical and regulatory risk The Group operates in a highly regulated environment for the testing, manufacture and supply of its products. Compliance with clinical and regulatory requirements within the EU affects not only the cost of product development and resource use, but also the time required to comply. Increased regulation may require products to be amended to comply with regulations and/or products have to be withdrawn, reducing revenues and/or increasing costs. Regulatory authorities such as the FDA are increasingly focussed on the benefit/ risk of pharmaceutical products and safety data making it more onerous to obtain regulatory approval. Compliance systems are in place to ensure all clinical, manufacturing and marketing activities comply with regulations in the EU and other territories. Standard operating procedures are maintained to ensure compliance with good manufacturing practice. The Group strictly monitors new industry regulations and engages with key Regulatory Authorities to inform the Group’s strategic direction and identify factors likely to affect the future development, performance and position of the Group’s business. Internal controls The system is designed to manage rather than eliminate risk. It can provide only reasonable and not absolute assurance against material misstatement or loss and includes the safeguarding of assets, the maintenance of proper accounting records, the reliability of financial information, compliance with appropriate legislation, regulation and best practice and the identification and management of business risk. The Group has an internal audit function, reporting directly to the Audit Committee, which carries out periodic reviews of the Group’s subsidiaries. The Group also has a budgeting and reporting system in place, with results compared to annual budgets and quarterly forecasts using variance analysis. The Strategic Report, as set out on pages 2 to 35 has been approved by the Board On behalf of the Board Ian Postlethwaite Company Secretary 37 © Allergy Therapeutics plcwww.allergytherapeutics.comBoard of Directors Board of Directors Peter Jensen Non-Executive Chairman (63) Manuel Llobet Chief Executive Officer (50) Appointed to the Board in October 2010 and appointed Non- Manuel joined the Group in July 2009 following the Executive Chairman on 1 January 2011. successful refinancing in which Azure Ventures Limited was As Non-Executive Chairman, Peter is responsible for the main investor. leadership of the Board by ensuring clear company strategy, Prior to this appointment, Manuel was the Principal Consultant board effectiveness, good corporate governance and effective for Biohealth LLC and CEO of International Operations of communication with shareholders. the Weinstein family’s group of companies. Manuel was Peter held a number of senior roles in his 21 years with family’s group of pharmaceutical companies in 20 countries. responsible for international development of the Weinstein SmithKline-Beecham. Between 1992 and 1998 he was Chairman of Consumer Healthcare Europe and between 1998 Mr Llobet has over ten years’ experience working in the and 2001 he held the position of President of Worldwide pharmaceutical industry, primarily in South America, and Supply Operations, based in Philadelphia. has served as Executive Director of Corporación Drokasa where he was responsible for a US$25 million AAA-rated Since leaving SmithKline-Beecham at the time of the merger bond issue to finance the group’s expansion plans; CEO of with Glaxo, Peter has held a number of non-executive director Laboratorios Andrómaco, where he led the group to an IPO and chairman roles for various public and private companies. on the Santiago Stock Exchange; and Business Development These include Domino Printing Sciences plc, Newmarket Manager for Laboratorio Chile. Manuel participated in the Racecourses Limited, Glenmorangie plc, Genetix Group plc Executive Program at the Graduate Business School of and Celsis International plc. Stanford University and has an MBA from IESE, Universidad de Navarra in Barcelona. Manuel also has degrees in Industrial In addition to his role at Allergy Therapeutics, Peter is Business Management and Chemical Engineering from currently Chairman of Nottingham Racecourse Limited, Universitat Ramon Llull in Barcelona. Screendragon Limited, The Home of Horseracing Trust Limited and The British Sporting Art Trust and is a director of As Chief Executive Officer, Manuel is responsible for the The Osborne Studio Gallery Limited. executive management of Group operations, investor relations, and implementation of the Board’s collective Peter chairs the Nomination Committee and is also a member decisions overseeing all operational aspects of the Group and of the Audit Committee. directing the long-term strategy. 40 © Allergy Therapeutics plcwww.allergytherapeutics.comIan Postlethwaite Finance Director (51) Stephen Smith Non-Executive Director (61) Ian Postlethwaite joined Allergy Therapeutics in April 2002 Stephen Smith is a Chartered Management Accountant, as Finance Director. Prior to this he worked for Ellerman Fellow of the Association of Corporate Treasurers and Investments (1997 - 2002), a UK private equity house, Member of the Institute for Turnaround. Since 1995, he undertaking the roles of Chief Executive Officer with AFS, has operated as an independent executive, Non-Executive one of the largest independent finance houses in the UK, Director and interim manager (CRO/CEO/COO/FD) on and Finance Director with a number of successful start-up an international basis. Up to 1995 Stephen held various technology companies. Previously he held senior finance senior financial positions in UK based international public positions with Ericsson, from 1994 - 1997, and Philips companies including 6 years as Group Treasurer of The Rank Electronics from 1989 - 1994. At AFS he raised £379 million Organisation and 3 years as Group Finance Director of a of funding for the business through a syndicated bank line, quoted hotel company. the issuance of commercial paper and a securitisation of finance assets. He is a Fellow of the Chartered Association Stephen chairs the Audit and Remuneration Committees, is a of Certified Accountants and is a non-executive director and member of the Nomination Committee which he chaired until Chairman of the Audit Committee of Shoreham Trust Port. 1 January 2011 and is the Senior Non-Executive Director. As Finance Director, Ian is responsible for Group financial reporting and control, tax, finance systems and internal audit. Ian is also the Company Secretary, a position he has held since 2004. 41 © Allergy Therapeutics plcwww.allergytherapeutics.comAlejandro Weinstein Jr Non-Executive Director (56) Thomas Lander, M.D. Non-Executive Director (62) Alejandro Weinstein Jr. is CEO of CFR Pharmaceuticals, Dr. Thomas Lander, M.D. is board certified in internal Chile. CFR Pharmaceuticals was listed on the Santiago Stock medicine and diabetology and, moreover, has a strong Exchange in 2010, with a presence currently in 17 countries scientific background in oncology and immunology with concentrated in South America. He is responsible for the a special emphasis on immunotherapy. He trained at the entire Weinstein family group of pharmaceutical companies, Technical University and the Institute for Immunology, whose origins can be traced back to 1922. Munich, Germany. He has spent more than 25 years in senior Alejandro has been active in developing and managing several including Boehringer Ingelheim, Novo Nordisk, Bristol-Myers- businesses and start-ups in the pharmaceutical industry and Squibb and GlaxoWellcome (GlaxoSmithKline) before joining the healthcare sector, including Genomika Foundation, a stem Merck KGaA (Merck Serono) as Executive Vice President, cell research organisation; Biomedical Research Consortium, Global Clinical R&D and Chief Medical Officer in 2003. executive positions in R&D with the pharmaceutical industry a joint venture between a biotech R&D Company and a university; Vidacel and Banco de Vida, public and private stem In 2006 he made a move to the biotech industry as managing cell banks in Chile; and several other joint ventures with local director of CureVac GmbH, Tuebingen. Since 2009, Dr. Lander and foreign R&D companies. Alejandro has a BA, is a Certified has been working as a strategic consultant and also a non- Public Accountant and participated in the Owner/President executive director for several European pharmaceutical and Management Program (OPM) at Harvard Business School. biotech companies. Alejandro sits on the Nomination Committee. Thomas sits on the Remuneration Committee. 42 © Allergy Therapeutics plcwww.allergytherapeutics.comi F n a n c a i l R e v i e w 43 © Allergy Therapeutics plcwww.allergytherapeutics.com Corporate Governance Corporate Governance The Board The Board is led by the Chairman, who is non-executive, and comprises the Chief Executive Officer, the Finance Director, and three other Non-Executive Directors. Biographical details of all Board members are shown on pages 38 to 40. The roles of Chairman and Chief Executive Officer are separate. The Directors feel that given the current size of the Group, the roles of Company Secretary and Finance Director are not deemed necessary to be separated. All Directors have direct access to the services and advice of the Company Secretary and to external independent professional advice at the expense of the Group. Directors Date of Appointment Attendance at meetings 2013-14 Peter Jensen Chairman Alejandro Weinstein Non-Executive Director Stephen Smith Non-Executive Director and Senior Independent Director Thomas Lander Non-Executive Director Manuel Llobet Chief Executive Officer Ian Postlethwaite Finance Director October 2010 July 2009 September 2004 May 2012 July 2009 July 2004 The dates of appointment above refer to appointment as Directors of Allergy Therapeutics plc. 14/14 1/14 14/14 13/14 14/14 14/14 We do not comply with the UK Corporate Governance Code. However, we have reported on our Corporate Governance arrangements by drawing upon best practice available, including those aspects of the UK Corporate Governance Code we consider to be relevant to the Group and best practice. The Group is subject to the city code on Takeover and Mergers. The Board delegates certain other responsibilities to committees, details of which are set out below. Board Committees The Group has an Audit Committee, a Remuneration Committee and a Nominations Committee, all with written terms of reference including formally delegated duties and responsibilities. The Chairman of each committee reports directly to the Board. The Audit Committee comprised Stephen Smith (Chairman) and Peter Jensen. The Audit Committee meets at least twice each year and is responsible for ensuring that the financial performance of the Group is properly reported and monitored, meeting with the Auditor, reviewing the reports from the Auditor relating to the financial statements and monitoring the internal control function. The Remuneration Committee comprised Stephen Smith (Chairman) and Thomas Lander. The Remuneration Committee reviews the compensation policy and strategy for the Group as a whole and the scale and structure of the executive Directors’ remuneration packages including the terms of their service contracts. No Director takes part in the discussion of his own remuneration. This committee is also responsible for the grant of shares under the Group’s Long Term Incentive Plan. The Nomination Committee comprised Peter Jensen (Chairman), Stephen Smith and Alejandro Weinstein. The Committee held two meetings during the past financial year. The Nominations Committee’s principal purpose is to consider the composition and size of the Board and its Committees as well as Board refreshment and board and senior management succession planning. Full details of Directors’ remuneration and a statement of the Group’s remuneration policy are set out in the Directors’ Remuneration Report on pages 54 to 56. Shareholder relations The Group maintains a policy of open dialogue with all shareholders to ensure that the objectives of the Group are understood. The Chief Executive Officer and the Finance Director make regular presentations to shareholders and discuss any areas of concern and meet regularly with analysts and major shareholders to provide information about the Group. The Chief Executive Officer and Finance Director had a number of meetings with shareholders and analysts during the financial year. 46 © Allergy Therapeutics plcwww.allergytherapeutics.comPress releases, general information on the Group, shareholder presentations and investor information are available to be accessed via the Group’s website, www.allergytherapeutics.com. Engagement of auditor for the supply of non-audit services It is the Group’s policy that it will only engage the Group’s auditor to supply other professional services to the Group and its subsidiary undertakings if it is satisfied that all the usual conditions of engagement and benchmarks are met. Any agreement to purchase services costing more than £10,000 per engagement must have the prior approval of the Audit Committee. In determining the policy, the Audit Committee has taken into account relevant ethical guidance regarding the provision of non- audit services by the external audit firm and does not agree to the auditor providing a service if, having regard to the ethical guidance, the result is that the external auditor audits its own work, the external auditor makes management decisions for the Group, a mutuality of interest is created or the external auditor is put in the role of advocate for the Group. 47 © Allergy Therapeutics plcwww.allergytherapeutics.comReport of the Directors Report of the Directors The Strategic Report The strategic report is on pages 2 to 35. The Directors consider that the Annual Report and Accounts, taken as a whole are fair, balanced and understandable. In reaching this conclusion the Board discussed the Strategic Report at their September 2014 Board meeting. The Board meets at least 11 times a year and the Directors are sufficiently well informed to be able to make such a judgement. Key Performance Indicators Key performance indicators are outlined in the Strategic Report on page 22. Corporate Governance Details of the Company’s Corporate Governance can be found on pages 38 to 45. Risk Management The Group’s exposure to Risk is set out on page 34 and 35, (principal risks and uncertainties and Note: 24 Financial Risk Management). Results & Dividend The profit for the year after taxation was £0.7 million (2013: £0.6 million). The results for the year are set out on page 65 and are dealt with in more detail in the Financial Review. Given the amount invested in research and development in the prior years the Group has negative distributable reserves and is unable to declare a dividend (2013: nil). Directors The current Directors of the Company and their biographical details are given on pages 38 to 40. The details of the Directors service contracts and their interests in the share capital of the Company at 30 June 2014 are disclosed in the Director’s Remuneration Report on pages 54 to 56. All the directors have served for the whole of the financial year. Directors’ indemnity The Directors and officers of the Company are insured against any claims arising against them for any wrongful act in their capacity as a Director, officer or employee of the Group, subject to the terms and conditions of the policy. Substantial shareholders At 10 September 2014 the Company had been notified of the following major interests, each representing 3% or more of the existing issued ordinary share capital: Shareholder CFR International SPA & Associated Holdings Southern Fox Investments Invesco Perpetual Annual General Meeting Ordinary shares 201,986,132 108,997,784 15,016,209 % held 49% 27% 3% The notice convening and giving details of the Annual General Meeting of the Group accompanies this report. Employees The Group employed 345 people at the year-end and is committed to achieving equality of opportunity in all employment practices. A thorough review of all employees is performed annually to identify and promote areas that require development and growth; feedback 50 © Allergy Therapeutics plcwww.allergytherapeutics.com is encouraged and sought. Staff are motivated by performance related incentives, which help to attract and retain the right people, and are encouraged to achieve business targets through market-rate pay, discretionary performance based bonuses and long term incentive programmes. The Board is committed to retaining staff as a high priority for the Group and implementing well balanced, challenging incentives makes this possible. Training and development appropriate to individual and business needs is offered and remuneration for professional development is considered on a case by case basis. The Group places considerable value on the involvement of its employees and has continued to keep them informed on matters affecting them as employees and on the various factors affecting the performance of the Group. This is achieved through formal and informal meetings and email updates. Family friendly employment policies conform to statutory requirements and flexible working practices are adopted where viable. Employment policies The Group implements equality of opportunity in all of its employment practices, policies and procedures. Employees are highly valued and their rights and dignity are respected. The Group practices equal treatment of all staff and potential staff irrespective of their race, creed, colour, sexual orientation, nationality, ethnic origin, religion, disability, age, gender or marital status. The equal opportunities section of the Staff Handbook covers all permanent and temporary employees, job applicants, agency staff, consultants and contractors. Equal opportunities The Group is committed to providing equal opportunities in employment irrespective of background, age, sexual orientation, religion, gender, nationality, marital status or disability. Our aim is to attract the best people in the industry and we believe in maximising every employee’s potential. The Group does not tolerate any harassment or discrimination. Disabled people The Group, in considering applications for employment from disabled people, seeks to ensure that fair consideration is given to the abilities and aptitudes of the applicant while having regard to the requirements of the job for which he or she has applied. Employees who become unable to carry out the requirements of the job for which they have been employed are given individual consideration and, depending on the nature, severity and duration of the disability may be considered for alternative work. Research and development The Group will continue its policy of investment in research and development, with the focus being in Germany where major allergy vaccines, if not already registered, require further clinical evidence. In accordance with International Financial Reporting Standards (IFRS), during the year the Group expensed to the income statement £3m (2013: £2.5m) on research and development. Further details on the Group’s research and development are included in the Strategic Report Review on pages 2 to 35. Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report on pages 2 to 35. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are also described in the Finance Director’s Financial Review on pages 30 to 31. In addition, Note 24 to the financial statements includes the Group’s objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and its exposures to foreign currency risk, interest rate risk and liquidity risk. After making appropriate enquiries, which included a review of the annual budget, considering the cash flow requirements for the foreseeable future, noting the new bank facility, and the effects of sales and foreign exchange sensitivities on the Group’s funding plans, the Directors continue to believe that the Group will have adequate resources to continue in operational existence for the foreseeable future and accordingly have applied the going concern principle in drawing up the financial statements. In reaching this view, the Directors have considered and prioritised the actions that could be taken to offset the impact of any shortfall in operating performance. 51 © Allergy Therapeutics plcwww.allergytherapeutics.comMarket value of land and buildings All freehold properties are stated at market value. The Group’s policy is that a full revaluation is carried out every five years with an interim valuation carried out in the third year after each full valuation. In the intervening years the directors review the carrying values of the freehold land and buildings to ensure that there have been no material variations. Strategic report The strategic report on pages 2 to 35 contains information on future developments and post balance sheet events. Statement of Directors’ responsibilities The Directors are responsible for preparing the Strategic Report and the Director’s Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors are required to prepare the group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and have elected to prepare the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable laws). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs and profit or loss of the company and group for that period. In preparing these financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgments and accounting estimates that are reasonable and prudent; • state whether applicable IFRSs and UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors confirm that in so far as each Director is aware: • • there is no relevant audit information of which the Group’s auditor is unaware; and the Directors have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the auditor are aware of that information. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Auditor Grant Thornton UK LLP offer themselves for reappointment as Auditor in accordance with section 489 of the Companies Act 2006. A resolution for their reappointment is to be proposed at the forthcoming Annual General Meeting. By order of the Board on 19 September 2014 Ian Postlethwaite Company Secretary 52 © Allergy Therapeutics plcwww.allergytherapeutics.com53 © Allergy Therapeutics plcwww.allergytherapeutics.comDirectors’ Remuneration Report Directors’ Remuneration Report The Remuneration Committee The Remuneration Committee comprised Stephen Smith (Chairman) and Thomas Lander during the financial year. The principal purpose of the Committee is to determine and agree the directors’ salary increases, annual bonuses, scope of pension arrangements and any changes in benefits. In addition, the Committee also agrees the share-related compensation for the Directors and other executive management and other executive compensation matters. Members Member since Stephen Smith November 2004 Thomas Lander May 2012 Remuneration policy Attendance at meetings 2013-2014 4/4 4/4 The Committee’s policy is to set remuneration packages for Executive Directors that are competitive with the market, allowing the Group to attract, motivate and retain executives of the highest calibre. Remuneration packages are designed to reward executives for performance via annual bonus payments and awards of share-related compensation, which together constitute a potentially significant proportion of the total remuneration opportunity. The remuneration of Executive Directors comprises the following elements: (i) Basic salary Basic salary is reviewed annually as at 1 October, taking into account personal performance, and benchmarked against a comparator group. (ii) Taxable benefits Taxable benefits represent the provision of a car allowance and private medical insurance. (iii) Share options No share options were granted in the year. The share options granted to individual Executive Directors to date are disclosed later in this report and comprise grants made in prior years under previous approved and unapproved option schemes. Share options previously granted by Allergy Therapeutics (Holdings) Limited were surrendered on 5 October 2004 for share options in Allergy Therapeutics plc, on substantially the same terms. (iv) Long Term Incentive Plan During the year ended 30 June 2014 provisional shares were awarded to directors and senior management under the Allergy Therapeutics plc 2013 Long Term Incentive Plan. Major shareholders were consulted on the new plan which was approved by the Board on 20 March 2013. The new plan is aligned with the Group’s performance (share price and profitability) rather than solely on share price performance compared to a group of other companies. The distribution of shares under the 2013 Plan is conditional on the Group’s performance over the 3-year Plan cycle for each award. The number of provisional shares awarded to Executive Directors under the Plans is shown in the Directors’ LTIP and share options table. (v) Bonus The Group operates a performance-related cash bonus scheme for executive directors based upon individual performance and achievement of personal and corporate objectives. Annual bonus payments are capped under service contracts at 60% for Manuel Llobet and 30% for Ian Postlethwaite. The bonuses are determined and agreed by the Remuneration Committee in September each year for the preceding financial year. (vi) Pension arrangements The UK Company operates a defined-contribution personal pension scheme and currently makes pension contributions in respect of all executive directors. 56 © Allergy Therapeutics plcwww.allergytherapeutics.com Service Contracts Executive Directors Manuel Llobet Ian Postlethwaite Non-Executive Directors Peter Jensen Thomas Lander Stephen Smith Alejandro Weinstein Date of contract 11 June 2009 7 May 2002 Date of contract 1 October 2010 2 May 2012 5 October 2004 1 July 2009 Notice period 12 months 12 months Notice period 6 months 3 months 3 months 3 months The service contracts for the Chief Executive Officer and Finance Director were reviewed during January 2014 with the assistance of board remuneration advisers. The Committee concluded that the Finance Director’s level of remuneration was in line with market levels. The Committee determined that the Chief Executive Officer’s remuneration was not in line with the market and his salary should be increased to £250,000 from £207,093 per annum and his maximum bonus be increased from 40% to 60% of salary. The remuneration of the Chairman and the Non-Executive Directors was also reviewed in June 2014 with external advice, as the fee had not been reviewed since 2009. As a result of the review the Chairman’s annual remuneration was increased by £10,000 to £75,000 and the Non-Executive Directors by £2,000 to £38,000 each. The review also resulted in an annual fee of £4,500 being awarded to the Chairman of the Audit Committee for this additional responsibility as commonly occurs amongst regulated companies. A Special Resolution is being proposed at the forthcoming Annual General Meeting to amend the Articles of Association of the Company to increase the quantum of the annual fees available to Non-Executive Directors which has remained at £200,000 since 2004. The proposal is to increase the quantum to £250,000. Directors’ remuneration (audited information) Details of remuneration of those who served as directors during the year are set out below: Basic Salary £ Bonus for the year Taxable benefits £ £ Manuel Llobet 227,038 64,000 10,909 Ian Postlethwaite 161,832 31,000 10,625 Peter Jensen Thomas Lander Stephen Smith1 Alejandro Weinstein 65,833 36,167 14,067 36,167 - - - - - - - - Year ended 30 June 2013 Fees Total Pension Total Pension £ - - - - £ £ £ £ 301,947 34,026 228,875 29,872 203,457 16,183 151,279 44,821 65,833 36,167 22,475 36,542 - 36,167 - - - - 65,000 36,000 46,000 36,000 - - - - Totals 541,104 95,000 21,534 22,475 680,113 50,209 563,154 74,693 1. Mr Smith’s fees payments are split between SRS Business Enterprises Limited and himself 57 © Allergy Therapeutics plcwww.allergytherapeutics.com Directors’ LTIPs and share options LTIPs held at 1 July 2013 LTIPs granted in the year LTIP share distributions in the year LTIPs lapsed in the year LTIPs held at 30 June 2014 Subscription price (pence) Exercise date from Expiry date Executive Directors Manuel Llobet 3,065,000 845,000 Ian Postlethwaite 163,5001 - 1,532, 500 422,500 Non-Executive Directors Stephen Smith 150,0001 - Totals 4,911,000 1,267,500 1. Share options - - - - - (720,000) 3,190,000 - - - - 163,5001 18.5 18/10/2009 18/10/2019 (360,000) 1,595,000 (150,000)1 - 45.0 26/02/2004 26/02/2014 (1,230,000) 4,948,500 At 30 June 2014 the London Stock Exchange mid-market value of shares was 15 pence per share. The range of mid-market values during the period from 1 July 2013 to 30 June 2014 was 6.75 pence to 30.75 pence per share. The Directors who held office at the end of the financial year had the following interests in the ordinary shares of the Company: At beginning of year: At end of year: Name Ordinary Shares Options & LTIPs Ordinary Shares Options & LTIPs Manuel Llobet1 Ian Postlethwaite Peter Jensen Thomas Lander Stephen Smith 3,125,000 1,360,000 120,000 - 776,513 3,065,000 1,532,500 - - 150,000 3,125,000 1,360,000 120,000 - 776,513 Alejandro Weinstein2 201,986,132 - 201,986,132 3,190,000 1,595,000 - - - - 1. Has an interest in shares pursuant to his interests in Wild Indigo 2. Has an interest in shares pursuant to his interests in Yissum Holding Limited, Azure Ventures & CFR International Stephen Smith Chairman, Remuneration Committee 58 © Allergy Therapeutics plcwww.allergytherapeutics.com 59 © Allergy Therapeutics plcwww.allergytherapeutics.comNominations Committee Report Nominations Committee Report The Nominations Committee during the year comprised Peter Jensen (Chairman), Stephen Smith and Alejandro Weinstein. The Nominations Committee was established in September 2009 and held twice during the past financial year. Its principal purpose is to consider and review proposals for the composition and size of the Board, its Committees and Senior Executives as well as refreshment and succession planning. Members Peter Jensen Stephen Smith Alejandro Weinstein Member since October 2010 September 2009 September 2009 Attendance at meetings 2013-14 2/2 2/2 0/2 When proposing appointments of directors, the Committee considers the skills, knowledge and experience that a candidate possesses compared to the skill sets and experience of the Board as it currently stands. The Group considers the independence of Non-Executive Directors of paramount importance, being a cornerstone of good corporate governance; as a result the Committee periodically reviews the independence of its Non-Executive Directors. Its review is based on independence as defined in the UK Corporate Governance Code which is not binding on an AIM listed company against the practicalities for an AIM Company. The Group draws upon best practice available, including those aspects of the UK Corporate Governance Code it is considered to be relevant to the Group and best practice. Last year the Committee undertook a review of the Independence of the Board. The review considered all the Non-Executive Directors and in particular Mr Stephen Smith’s position. The review noted that his term of office being over 9 years is contrary to the UK Corporate Governance Code and his contribution in the capacity as Chairman of the Audit Committee, and his experience, integrity and strength of character continues to make a major contribution to the Board. Mr Stephen Smith now no longer holds any share options, which lapsed in February 2014. He is therefore regarded as an independent Non-Executive Director, with Mr Thomas Lander as the other independent Non-Executive Director. The Board now consists of four Non-Executive Directors, with three (including the Chairman) being independent and two Executive Directors. Peter Jensen Chairman, Nominations Committee 62 © Allergy Therapeutics plcwww.allergytherapeutics.com63 © Allergy Therapeutics plcwww.allergytherapeutics.comFinancial Statements Independent Auditor’s Report to the Members of Allergy Therapeutics plc (Group) We have audited the group financial statements of Allergy Therapeutics plc for the year ended 30 June 2014 which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 50, the directors are responsible for the preparation of the group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc. org.uk/apb/scope/private.cfm. Opinion on financial statements In our opinion the group financial statements: • • • give a true and fair view of the state of the group’s affairs as at 30 June 2014 and of its profit for the year then ended; have been properly prepared in accordance with IFRSs as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and Directors’ Report for the financial year for which the group financial statements are prepared is consistent with the group financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Other matter We have reported separately on the parent company financial statements of Allergy Therapeutics plc for the year ended 30 June 2014. Christian Heeger Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Gatwick 19 September 2014 66 © Allergy Therapeutics plcwww.allergytherapeutics.com Consolidated Income Statement for the year ended 30 June 2014 Revenue Cost of sales Gross profit Distribution costs Administration expenses – other Research and development costs Administration expenses Other income Operating profit Finance income Finance expense Profit before tax Income tax Profit for the period Earnings per share Basic (pence per share) Diluted (pence per share) Note 3 8 10 9 5 11 13 Year to 30 June 2014 Year to 30 June 2014 £’000 £’000 Year to 30 June 2013 As restated £’000 Year to 30 June 2013 As restated £’000 41,955 (11,951) 30,004 (17,922) 39,279 (11,953) 27,326 (16,278) (7,986) (2,963) (7,845) (2,535) (10,949) (10,380) 76 1,209 170 (295) 1,084 (343) 741 0.16p 0.16p - 668 110 (249) 529 104 633 0.14p 0.13p 67 © Allergy Therapeutics plcwww.allergytherapeutics.comConsolidated Statement of Comprehensive Income for the year ended 30 June 2014 Note 26 17 Profit for the period Items that will not be reclassified subsequently to profit or loss: Remeasurement of net defined benefit liability Revaluation gains - freehold land & buildings Remeasurement of investments – retirement benefit assets Items that will be reclassified subsequently to profit or loss: Exchange differences on translation of foreign operations Total comprehensive profit/(loss) Year to 30 June 2014 £’000 741 (271) - (10) (191) 269 Year to 30 June 2013 As restated £’000 633 (871) 17 (108) 77 (252) 68 © Allergy Therapeutics plcwww.allergytherapeutics.comConsolidated Balance Sheet Assets Non-current assets Property, plant and equipment Intangible assets – goodwill Intangible assets – other Investments – retirement benefit asset Deferred taxation asset Total non-current assets Current assets Trade and other receivables Inventories Cash and cash in hand Derivative financial instruments Total current assets Total assets Liabilities Current liabilities Trade and other payables Current borrowings Derivative financial instruments Total current liabilities Net current assets Non current liabilities Retirement benefit obligations Deferred taxation liability Non current provisions Other non current liabilities Total non current liabilities Total liabilities Net assets Equity Capital and reserves Issued share capital Share premium Merger reserve – shares issued by subsidiary Reserve – EBT Reserve – share based payments Reserve – convertible loan notes Revaluation reserve Foreign exchange reserve Retained earnings Total equity Note 16 14 15 17 12 19 18 20 24 21 22 24 26 12 23 21 27 30 June 2014 £’000 30 June 2013 As restated £’000 7,030 2,480 1,291 3,212 174 14,187 5,368 6,469 2,029 345 14,211 28,398 (6,425) (49) - (6,474) 7,737 (6,418) (136) (222) (73) (6,849) (13,323) 15,075 420 67,716 40,128 67 465 3,652 1,178 (21) (98,530) 15,075 7,337 2,560 1,350 3,059 200 14,506 7,185 6,014 1,257 2 14,458 28,964 (7,006) (288) (326) (7,620) 6,838 (6,214) (159) (300) (6,673) (14,293) 14,671 420 67,716 40,128 67 679 3,652 1,178 170 (99,339) 14,671 These financial statements were approved by the Board of Directors on 19 September 2014 and were signed on its behalf by Manuel Llobet Chief Executive Officer Ian Postlethwaite Finance Director Registered number: 05141592 69 © Allergy Therapeutics plcwww.allergytherapeutics.com Consolidated Statement of Changes in Equity Issued Capital Share premium Merger reserve – shares issued by subsidiary Reserve - shares held in EBT Reserve - share based payment Reserve – convertible loan note Revaluation Foreign exchange Retained earnings Total equity reserve reserve As restated As restated As restated £’000 417 £’000 67,571 £’000 40,128 £’000 67 £’000 1,496 £’000 3,652 £’000 1,161 - - - - - - - - 3 - - - - - - - - - 145 - - - - - - - - - - - - - - - - - - - - - At 30 June 2012 Exchange differences on translation of foreign operations Remeasurement of net defined benefit liability Valuation gain taken to equity (Land and Buildings) Remeasurement of investments – retirement benefit assets Total other comprehensive income Profit for the period after tax Total comprehensive income Transactions with owners Share based payments Shares issued Transfer of lapsed options to retained earnings At 30 June 2013 420 67,716 40,128 67 679 3,652 1,178 (99,339) 14,671 Exchange differences on translation of foreign operations Remeasurement of net defined benefit liability Remeasurement of investments – retirement benefit assets Total other comprehensive income Profit for the period after tax Total comprehensive income Transactions with owners Distribution to shareholder-Convertible loan note Share based payments Shares issued Transfer of lapsed options to retained earnings - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - At 30 June 2014 420 67,716 40,128 67 465 3,652 1,178 (21) (98,530) 15,075 - - - - - - - - - - - - - - - - 183 (1,000) 184 (398) - - - - - - - - - - - - - - - - - - - - 17 17 17 - - - - - - - - - - - - - - - - - £’000 93 77 77 77 170 (191) (191) (191) - - - - - - - - - - - - - - (346) (252) £’000 (99,993) (871) (108) (979) 633 - - - - 1,000 - (271) (10) (281) 741 460 (49) - - 398 £’000 14,592 77 (871) 17 (108) (885) 633 183 148 - (191) (271) (10) (472) 741 269 (49) 184 - - 70 © Allergy Therapeutics plcwww.allergytherapeutics.comIssued Capital premium Share Merger reserve – Reserve - shares shares issued by subsidiary held in EBT Reserve - share based payment Reserve – convertible loan note Revaluation reserve Foreign exchange reserve Retained earnings Total equity As restated As restated As restated £’000 417 £’000 67,571 £’000 40,128 £’000 67 £’000 1,496 £’000 3,652 £’000 1,161 - - - - - - - 183 - (1,000) - - - - - - - - - - - - 17 - 17 - 17 - - - At 30 June 2013 420 67,716 40,128 67 679 3,652 1,178 - - - - - - - 184 - (398) - - - - - - - - - - - - - - - - - - - - At 30 June 2012 Exchange differences on translation of foreign operations Remeasurement of net defined benefit liability Valuation gain taken to equity (Land and Buildings) Remeasurement of investments – retirement benefit assets Total other comprehensive income Profit for the period after tax Total comprehensive income Transactions with owners Share based payments Shares issued Transfer of lapsed options to retained earnings Exchange differences on translation of foreign operations Remeasurement of net defined benefit liability Remeasurement of investments – retirement benefit assets Total other comprehensive income Profit for the period after tax Total comprehensive income Transactions with owners Distribution to shareholder-Convertible loan note Share based payments Shares issued Transfer of lapsed options to retained earnings - 3 - - - - - - - - - - - - - - - - - - 145 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - £’000 93 77 - - - 77 - 77 - - - 170 (191) - - (191) - (191) - - - - £’000 (99,993) - (871) - (108) (979) 633 £’000 14,592 77 (871) 17 (108) (885) 633 (346) (252) - - 1,000 183 148 - (99,339) 14,671 - (271) (10) (281) 741 460 (49) - - 398 (191) (271) (10) (472) 741 269 (49) 184 - - At 30 June 2014 420 67,716 40,128 67 465 3,652 1,178 (21) (98,530) 15,075 71 © Allergy Therapeutics plcwww.allergytherapeutics.comConsolidated Cash Flow Statement Cash flows from operating activities Profit before tax Adjustments for: Finance income Finance expense Non cash movements on defined benefit pension plan Depreciation and amortisation Charge for share based payments Derivative financial instruments Disposal of intangible assets and property, plant and equipment Decrease/(increase) in trade and other receivables (Increase)/decrease in inventories (Decrease)/increase in trade and other payables Net cash generated by operations Interest paid Income tax Net cash generated by operating activities Cash flows from investing activities Interest received Investments Payments for intangible assets Payments for property plant and equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issue of equity shares and convertible loan notes Net cash generated by financing activities Net increase in cash and cash equivalents Effects of exchange rates on cash and cash equivalents Cash and cash equivalents at the start of the period Cash and cash equivalents at the end of the period Cash at bank and in hand Bank overdraft Cash and cash equivalents at the end of the period 72 Note 10 9 15,16 Year to 30 June 2014 £’000 Year to 30 June 2013 As restated £’000 1,084 529 (170) 295 160 1,287 184 (669) 1 1,689 (625) (911) 2,325 (102) (50) 2,173 71 (281) (22) (898) (110) 249 79 1,342 183 787 607 (2,164) 767 746 3,015 (211) (372) 2,432 19 (355) (157) (664) (1,130) (1,157) - - 1,043 (78) 1,064 2,029 2,029 - 2,029 148 148 1,423 50 (409) 1,064 1,257 (193) 1,064 © Allergy Therapeutics plcwww.allergytherapeutics.comNotes to the Financial Statements 1. BASIS OF PREPARATION The Group’s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) in issue as adopted by the European Union (‘EU’). Allergy Therapeutics plc is the Group’s parent company. The Company is a limited liability company incorporated and domiciled in England. The address of Allergy Therapeutics plc’s registered office and its principal place of business is Dominion Way, Worthing, West Sussex and its shares are listed on the Alternative Investment Market (AIM). The consolidated financial statements for the year ended 30 June 2014 (including comparatives) have been prepared under the historical cost convention except for land and buildings and derivative financial instruments which have been measured at fair value. They were approved and authorised for issue by the Board of Directors on 19 September 2014. New standards adopted There are no IFRS or IAS interpretations that are effective for the first time in this financial period that have had a material impact on the Group. In preparing the consolidated accounts the Group has adopted the following new IFRS and IAS interpretations. IFRS 10 Consolidated Financial Statements (effective 1 January 2014 – adopted early) This IFRS establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 12 Disclosure of Interests in Other Entities (effective 1 January 2014 – adopted early) This IFRS looks at the disclosure of information that enables users of financial statements to evaluate the nature of, and risks associated with, the Group’s interests in other entities, and the effects of those interests on its financial position, financial performance and cash flows. IFRS 13 Fair Value Measurement (effective 1 January 2013) IFRS 13 seeks to increase consistency and comparability in fair value measurements and related disclosures through a ‘fair value hierarchy’. IFRS 13 clarifies the definition of fair value and provides related guidance and enhanced disclosures about fair value measurements. It does not affect which items are required to be fair valued. Amendments to IAS 19 (Revised June 2011) Employee Benefits (effective 1 January 2013) IAS 19 reviews the treatment of employee benefits with a view to recognising the cost in the period in which the benefit is earned by the employee, rather than when it is paid or payable. The revised version of IAS 19 ‘Employee Benefits’ (IAS19R) (as of 1 January 2013) makes a number of changes to the accounting for employee benefits, the most significant relating to defined benefit plans. IAS 19R: • eliminates the ‘corridor method’ and requires the recognition of remeasurements (including actuarial gains and losses) arising in the reporting period in other comprehensive income • changes the measurement and presentation of certain components of the defined benefit cost. The net amount in profit or loss is affected by the removal of the expected return on plan assets and interest cost components and their replacement by a net interest cost based on the net defined benefit asset or liability • enhances disclosures, including more information about the characteristics of defined benefit plans and related risks 73 © Allergy Therapeutics plcwww.allergytherapeutics.comIAS 19R has been applied retrospectively in accordance with its transitional provisions. Consequently, the Group has restated its reported results throughout the comparative periods presented. There was no adjustment to total equity. The effects on the income statement and the statement of comprehensive income for the current year and the prior year are: 12 months to 30 June 2014 12 months to 30 June 2013 Increase in finance income Decrease in finance expense Increase in Profit Other comprehensive income: Remeasurement of investments – retirement benefit assets Increase in loss on remeasurement of net defined benefit liability Decrease in other comprehensive income Change in total comprehensive income Change in earnings per share (basic and diluted) £000 99 15 114 (99) (15) (114) - +2p £000 91 6 97 (91) (6) (97) - +2p Following the adoption of IAS 19R remeasurement of investments related to the retirement benefit plan that had previously been passed through the revaluation reserve have been reclassified to retained earnings. As at 1st of July 2012 the revaluation reserve was reduced by £136,000 from £1,297,000 to £1,161,000 with a corresponding credit to retained earnings. The application of IAS 19R did not have an effect on the statement of cash flows for the year ended 30 June 2014 and the prior year. IAS 27 (Revised) Separate Financial Statements (effective 1 January 2013) IAS 27 is concerned with the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent, and in accounting for investments in subsidiaries, jointly controlled entities and associates when an entity elects, or is required by local regulations, to present separate (non-consolidated) financial statements. Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group in the 30 June 2014 financial statements At the date of authorisation of these financial statements, certain new standards, amendments and interpretations to existing standards have been published but are not yet effective. Not all of these have yet been adopted by the EU. The Group has not adopted any of these pronouncements early. The new standards, amendments and interpretations that are expected to be relevant to the Group’s financial statements are as follows: IFRS 9 Financial Instruments (effective 1 January 2015) This IFRS replaces IAS39 and addresses the usefulness for users of financial statements by simplifying the classification and measurement requirements for financial instruments. Management are currently assessing the detailed impact on the Group’s financial statements. IFRS 15 Revenue from Contracts with Customers (issued in May 2014 and effective 1 January 2017) IFRS 15 supersedes current revenue recognition guidance including IAS 18, Revenue, and specifies how and when entities recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles based five-step model to be applied to all contracts with customers. 74 © Allergy Therapeutics plcwww.allergytherapeutics.comManagement anticipate that the above pronouncements will be adopted in the Group’s financial statements in line with the effective dates stated above. Management are currently assessing their detailed impact on the Group’s financial statements. Other new standards and interpretations have been issued but are not expected to have a material impact on the Group’s financial statements. Going concern For the year ended 30 June 2014, and for the fifth year in succession, the Group has reported an operating profit and an operating cash inflow. Operating profit in the period was £1.2 million (2013: £0.7 million); net cash from operations was £2.3 million (2013: £3.0 million). The Group has prepared detailed budgets, including cash flow projections, for the periods ending 30 June 2015 and 30 June 2016. These projections include assumptions on the trading performance of the operating business and the continued availability of the existing overdraft facilities. After making appropriate enquiries, which included a review of the annual budget, by considering the cash flow requirements for the foreseeable future and the effects of sales and other sensitivities on the Group’s funding plans, the Directors continue to believe that the Group will have adequate resources to continue in operational existence for the foreseeable future and accordingly have applied the going concern principle in drawing up the financial statements. In reaching this view, the Directors have considered and prioritised the actions that could be taken to offset the impact of any shortfall in operating performance. 2. ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented unless otherwise stated. Consolidation The Group’s financial statements consolidate those of the parent company and all of its subsidiaries drawn up to 30 June 2014. The parent controls a subsidiary if it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated on the date control ceases. Inter-company transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated except for unrealised losses if they show evidence of impairment. Where necessary, adjustments are made to the financial statements of subsidiaries to bring accounting policies used into line with those used in the Group. The Group uses the acquisition method of accounting for the acquisition of a subsidiary. The cost of an acquisition is measured by the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination that meet the conditions for recognition under IFRS 3 (Revised) Business Combinations, are recognised at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of the acquisition is less than the fair value of the net assets of the subsidiary acquired the difference is recognised directly in the profit or loss. Goodwill Goodwill arising from business combinations is the difference between the fair value of the consideration paid and the fair value of the assets and liabilities and contingent liabilities acquired. It is initially recognised as an intangible asset at cost and is subject to 75 © Allergy Therapeutics plcwww.allergytherapeutics.comimpairment testing on an annual basis or more frequently if circumstances indicate that the asset may have been impaired. Details of impairment testing are described in the accounting policies. Intangible assets acquired as part of a business combination Intangible assets acquired in a business combination are identified and recognised separately from goodwill where they satisfy the definition of an intangible asset and their fair values can be measured reliably. The cost of such intangible assets is their fair value at the acquisition date. Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses. Internally generated intangible assets An internally generated intangible asset arising from development (or the development phase) of an internal project is recognised if, and only if, all of the following have been demonstrated: • • • • • the technical feasibility of completing the intangible asset so that it will be available for use or sale the intention to complete the intangible asset and use or sell it the ability to use or sell the intangible asset how the intangible asset will generate probable future economic benefits the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset • the ability to measure reliably the expenditure attributable to the intangible asset during its development The amount initially recognised for internally generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally generated intangible asset can be recognised, research and development expenditure is charged to profit or loss in the period in which it is incurred. Subsequent to initial recognition, internally generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses. Amortisation shall begin when the asset is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Amortisation of all intangible assets is calculated on a straight line basis over the useful economic life using the following annual rates: Manufacturing know-how Non-competing know-how 15 years 4 years Other intangibles/distribution agreements 15 years / period of contract Computer software 7 years These periods were selected to reflect the assets’ useful economic lives to the Group. The cost of amortising intangible assets is included within administration costs in the consolidated income statement. Segmental reporting The Group’s operating segments are market based and are reported in a manner consistent with the internal reporting provided to the Group’s Chief Operating Decision Maker (CODM) who has been identified as the Executive Directors. The CODM is responsible for allocating resources and assessing the performance of the operating segments. In identifying its operating segments, management follow the Group’s revenue lines which represent the main geographical markets within which the Group operates. These operating segments are managed separately as each requires different local expertise, regulatory knowledge and a specialised marketing approach. Each market based operating segment is engaged in 76 © Allergy Therapeutics plcwww.allergytherapeutics.comproduction, marketing and selling within a particular economic environment that is different from that in segments operating in other economic environments. All inter-segment transfers are carried out at arm’s length prices. Foreign currency translation Functional and presentational currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The Group’s presentational currency is Sterling, which is also the functional currency of the Group’s parent. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation, at reporting period end exchange rates, of monetary assets and liabilities denominated in foreign currencies, are recognised in the income statement. Non-monetary items are carried at historical cost or translated using the exchange rate at the date of the transaction or an average rate as an approximation where this is not materially different. Foreign operations In the Group’s financial statements, all assets, liabilities and transactions of Group entities with a functional currency other than Sterling are translated into Sterling upon consolidation. The functional currency of the entities in the Group has remained unchanged during the reporting period. On consolidation, assets and liabilities have been translated into Sterling at the closing rate at the reporting date. Goodwill and fair value adjustments arising on the acquisition of a foreign entity have been treated as assets and liabilities of the foreign entity and translated into Sterling at the closing rate. Income and expenses have been translated into Sterling at the average rate over the reporting period. Exchange differences are charged or credited to other comprehensive income and recognised in the currency translation reserve in equity. Revenue recognition Revenue is measured by reference to the fair value of consideration received or receivable by the Group for goods supplied and services provided, net of statutory rebates paid in Germany and excluding value added tax. Revenue is recognised upon the performance of services or transfer of risk to the customer. Sale of goods Revenue from the sale of goods is recognised when all the following conditions have been satisfied: • the Group has transferred to the buyer the significant risks and rewards of ownership of the goods, which is generally when the customer has physically received the goods. • the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold which is again when the customer has physically received the goods. the amount of revenue can be measured reliably. it is probable that the economic benefits associated with the transaction will flow to the Group, and the costs incurred or to be incurred in respect of the transaction can be measured reliably. • • • Where the Group provides services to new distributors, which mainly include marketing and customer information, in exchange for an up-front lump sum fee, revenue is recognised in line with these services being delivered. Services are fair valued and pro-rated to agree to the total fee receivable. Where there is an on-going responsibility to provide services, the balance relating to those services is recognised in future periods as the service is performed. A small proportion of the Group’s overseas sales are made through distributors and agents. 77 © Allergy Therapeutics plcwww.allergytherapeutics.comArrangements for sales through distributors For all distributor arrangements, the distributor is invoiced at the time of delivery and title to the product passes upon full and final settlement of the invoice to which the delivery relates. The distributor has full discretion over the setting of the final selling price to the end customer and is responsible for all customer returns of product. It is considered that the significant risks and rewards of ownership of the product are transferred to the distributor at the point of delivery and therefore revenue is recognised at this point in accordance with IAS 18. Where the Group sells to distributors at initially low margin and there is further consideration receivable by the group, this deferred consideration forms part of the fair valuation of consideration receivable by the Group for goods supplied. In these instances the deferred consideration is accrued at a discounted value at the point of delivery. Arrangements for sales through agents For all agreements with agents, the agent places orders with the Group, and goods are then shipped to them. The Group however, holds title to these products until they are sold on to a third party. The selling price to the end user is set by the relevant Government body and the agent receives a fixed percentage of this selling price. The agent notifies the Group monthly on stock levels and this is reconciled to a statement which generates an invoice for payment by the agent. The Group is responsible for any customer returns of product. It is considered that the significant risks and rewards of ownership of the product are not transferred from the Group until the agent has sold the product to a third party and therefore revenue on these sales is recognised only at this point by the Group in accordance with IAS 18 appendix 2 (c). Statutory Rebates In Germany, Pharmaceutical companies are required to pay a manufacturer’s rebate to the government as a contribution to the cost of medicines paid for by the State and private health funds. This is similar to a sales tax and the rebate is therefore treated as a deduction from revenue in accordance with IAS18.8. Rebates have been in the region of 6% (inclusive of VAT). However, in 2010 the German government increased the rate to 16%. In certain circumstances, companies could apply for an exemption from the rebate increase, for limited periods at a time. If the application for the exemption is successful, a preliminary exemption is normally granted to be converted to a final exemption at a later date when audited financial statements are available. Allergy Therapeutics plc has been successful in obtaining preliminary exemptions up to 30 June 2012, which have been subsequently confirmed as final. Revenue is recognised initially net of the 16% rebate, as at that stage it is not considered probable that any refund of the rebate will be received. When the preliminary exemption is granted, it is considered probable, based on our past experience, that the rebate refund will be received. Therefore, as it is probable that the economic benefits will flow to Allergy Therapeutics Plc, in accordance with IAS 18.14(d), revenue is adjusted at that time. Expenditure recognition Operating expenses are recognised in the income statement upon utilisation of the service or at the date of their origin. Property, plant and equipment The Group policy is that all freehold properties will be subject to a full revaluation at least every five years with an interim valuation carried out in accordance with IAS 16 in the third year after each valuation. 78 © Allergy Therapeutics plcwww.allergytherapeutics.comRevaluations are performed by independent qualified and experienced valuers who have adequate local knowledge in the country in which the property is situated. In the intervening years between independent revaluations, the directors review the carrying values of the freehold land and buildings and adjustments are made if the carrying values differ significantly from their respective fair values. Increases in the carrying value from revaluations are recognised in other comprehensive income and accumulated in equity under the heading of revaluation reserve unless this reverses a revaluation decrease on some asset previously recognised in profit and loss, in which case it is first credited to profit and loss to that extent. When an item of property, plant and equipment is revalued, any accumulated depreciation at the date of the revaluation is restated proportionately with the change in the gross carrying amount of the asset. The amount of the adjustment arising on the restatement or elimination of accumulated depreciation forms part of the increase or decrease in carrying amount. Decreases in the carrying values arising from revaluations are first offset against increases from earlier revaluations in respect of the same assets and are thereafter charged to profit or loss. Plant and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses. Provision for depreciation of all tangible assets of the Group (except land) is made over their estimated useful lives, on a straight line basis principally using the following annual rates: Freehold buildings Computer equipment Motor vehicles Fixtures and fittings Plant and equipment 33 years 3 – 7 years 4 years 5 – 15 years 5 – 15 years Asset residual values and useful lives are reviewed annually and amended as necessary. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the fixed asset may not be recoverable. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount exceeds the higher of the asset’s fair value less costs to sell or value in use. During the prior year the asset lives of ‘Fixtures and fittings’ and ‘Plant and equipment’ were extended up to a maximum of 15 years (previous maximum useful life was 10 years). The effect of this change is described in Note 16. Depreciation charges are included when arriving at operating profit in the income statement. Impairment The Group’s goodwill, other intangible assets, freehold land and buildings and plant & equipment are subject to impairment testing. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Goodwill is allocated to those cash generating units that are expected to benefit from synergies of the related business combination and represent the lowest level within the Group at which management controls the related cash flows. Individual assets or cash generating units that include goodwill with an indefinite useful life or those not yet available for use are tested for impairment at least annually. All other individual assets or cash generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the assets or cash generating units carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell and value in use, based on an internal discounted cash flow evaluation. Impairment losses recognised for cash generating units, to which goodwill has been allocated, are credited initially to the carrying amount of goodwill. Any remaining impairment loss is charged pro rata to the other assets in the cash generating unit. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. 79 © Allergy Therapeutics plcwww.allergytherapeutics.comInventories Inventory is carried at the lower of cost or net realisable value. The costs of raw materials, consumables, work in progress and finished goods are measured by means of weighted average cost using standard costing techniques. Cost of finished goods and work in progress comprises direct production costs such as raw materials, consumables, utilities and labour, and production overheads such as employee costs, depreciation, maintenance and indirect factory costs. Standard costs are reviewed regularly in order to ensure relevant measures of utilisation, production lead time and appropriate levels of manufacturing expense are reflected in the standards. As part of the continuous refinement of standard costs, in July 2013 a new cost set was applied in which an increased proportion of manufacturing cost was absorbed by intermediate processes (rather than finishing processes) as this more accurately reflects the conversion cost of inventory. This resulted in an increased value of inventory at 30 June 2014 of £486,000. If this allocation method had been used in the prior year, inventory would have increased by approximately £500,000. Net realisable value is calculated based on the revenue from sale in the normal course of business less any costs to sell. Research & Development investment credits Investment credits are directly related to the Group’s qualifying research and development expenditure and have a monetary value that is independent of the Group’s tax liability. Such investment credits are dealt with in other income in the income statement. Leases Operating lease rentals are charged to the income statement over the term of the lease. There are no finance leases. Financial assets Financial assets consist of cash, trade and other receivables and derivative financial instruments. Financial assets are assigned to their different categories by management on initial recognition, depending on the contractual arrangements. Cash and cash equivalents comprise cash on hand, demand deposits and overdrafts, together with other short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. All financial assets are recognised when the Group becomes a party to the contractual provisions of the instrument and loans and receivables are initially recognised at fair value, including transaction costs, with the exception of ‘fair value through profit and loss’ and subsequently at amortised cost, with any changes going through profit or loss. Where securities are designated as ‘fair value through profit and loss’ gains and losses arising from changes in fair value are included in net profit or loss for the period. Derecognition of financial assets occurs when the rights to receive cash flows from the investments expire or are transferred and substantially all of the risks and rewards of ownership have been transferred. An assessment for impairment is undertaken at least at each balance sheet date whether or not there is objective evidence that a financial asset or a group of financial assets is impaired. Financial liabilities The Group’s financial liabilities include bank loans, trade and other payables and derivative financial instruments. Financial liabilities are recognised when the Group becomes a party to the contractual agreements of the instrument. All interest related charges are recognised as an expense in ‘Finance costs’ in the income statement. Trade and other payables are recognised initially at their fair value and subsequently measured at amortised cost using the effective interest method. 80 © Allergy Therapeutics plcwww.allergytherapeutics.comBorrowings comprise secured bank borrowings, and are initially recognised at the fair value of the consideration received net of issue costs associated with the borrowings. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Convertible loan notes Convertible loan notes are regarded as compound instruments consisting of a liability component and an equity component. At the date of issue the fair value of the liability component is estimated using a discount rate for an equivalent liability without the conversion feature. The difference between the proceeds of issue of the convertible loan note and the fair value assigned to liability component, representing the embedded option to convert the liability into equity of the Group, is included in equity. Derivative financial instruments The Group uses interest rate swaps, Canadian Dollar forward contracts, Euro forward contracts and Euro exchange swaps to manage the exposure to changes in interest and translation rates and these are classified as derivative financial instruments. All derivative financial instruments are initially measured at fair value on acquisition and are subsequently restated to fair value at each reporting date. Any change in the fair value of the instruments is recognised in either administration expenses or finance expenses in the income statement. Equity Equity comprises the following: • • “Issued capital” represents the nominal value of equity shares that have been issued. “Share premium” represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue. • “Merger reserve” represents the excess over nominal value of the fair value of consideration received for equity shares issued on acquisition of subsidiaries, net of expenses of the share issue. • “Reserve - Shares held in EBT” represents the shares acquired by a trust set up for the benefit of the Group’s employees. These shares are deducted from shareholders funds at the cost that the shares were acquired. The net proceeds received from the issue of these shares through the exercise of options are also recognised through this reserve. • “Reserve - share based payments” represents equity-settled share-based employee remuneration until such share options are exercised. • “Reserve - convertible loan notes” represents the equity component of consideration received for convertible loan notes, net of expenses. • • “Revaluation reserve” represents the revaluations of investment assets and land and buildings. “Foreign exchange reserve” represents the foreign currency translation differences that have occurred since the transition date. Exchange differences prior to this date are included within retained earnings. • “Retained earnings” represents retained profits and losses. Equity is any contract which evidences a residual interest in the assets of the Group after deducting all its liabilities. Income taxes Current income tax assets and liabilities comprise those obligations to fiscal authorities in the countries in which the Group carries out its operations. They are calculated according to the tax rates and tax laws applicable to the fiscal period and the country to which they relate. All changes to current tax liabilities are recognised as a component of tax expense in the income statement. Deferred income taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is neither provided on the initial recognition of goodwill nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax on temporary differences associated with shares in subsidiaries is not provided if reversal of these temporary differences can be controlled by the Group and it is probable that reversal will not occur in 81 © Allergy Therapeutics plcwww.allergytherapeutics.comthe foreseeable future. Tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets. Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date. Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement, except where they relate to items that are charged or credited directly to other comprehensive income (such as the revaluation of land and buildings) in which case the related deferred tax is also charged or credited directly to other comprehensive income. Defined benefit pension scheme Scheme assets are measured at fair values. Scheme liabilities are measured on an actuarial basis using the projected unit credit method and are discounted at appropriate high quality corporate bond rates that have terms to maturity approximating to the terms of the related liability. Interest expense or income is calculated on the net defined benefit liability (asset) by applying the discount rate to the net defined benefit liability (asset). Past service cost is recognised in the income statement in the period when the plan is amended. Remeasurements are recognised in the balance sheet immediately with a charge or credit to other comprehensive income in the periods in which they occur. The related deferred tax is shown with other deferred tax balances. A surplus is recognised only to the extent that it is recoverable by the Group. The current service cost, past service cost and costs from settlements and curtailments are charged against administrative expenses in the income statement. Interest on the scheme liabilities and the expected return on scheme assets are included in other finance costs. Short-term employee benefits, including holiday entitlement are included in current pension and other employee obligations at the undiscounted amount that the Group expects to pay as a result of the unused entitlement. Investments Investments relate to long-term insurance policies. In accordance with IAS19 these cannot be directly deducted from the German pension obligation. These are recognised as a separate asset, rather than as a deduction in determining the defined benefit liability. Interest income is recognised though the income statement. They are held at fair value with any gains or losses on remeasurement charged or credited to other comprehensive income. Provisions Provisions are recognised when the present obligations arising from legal or constructive obligations resulting from past events, will probably lead to an outflow of economic resources from the Group which can be estimated reliably. Provisions are measured at the present value of the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the balance sheet date. All provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimates. Share based employee compensation The Group operates equity-settled share based compensation plans for remuneration of its employees comprising Long Term Incentive Plan (LTIP) schemes. 82 © Allergy Therapeutics plcwww.allergytherapeutics.comAll employee services received in exchange for the grant of any share based compensation are measured at their fair values. These are indirectly determined by reference to the share option or shares awarded. Their value is appraised at the grant date and excludes the impact of any non-market vesting conditions (e.g. profitability or sales growth targets). The fair value of LTIP shares, which have market conditions attached, includes an adjustment based on the probability of the shares vesting at the end of the vesting period. Details of the LTIP schemes and the conditions applying to each scheme are disclosed in Note 28 (Share Based Payments) on page 105. All share based compensation is ultimately recognised as an expense in the consolidated income statement with a corresponding credit to the share based payments reserve, net of deferred tax where applicable. If vesting periods or other vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Non market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. No adjustment to expense recognised in prior periods is made if fewer share options ultimately are exercised than estimated. Upon exercise of share options, the proceeds received, net of any directly attributable transaction costs, up to the nominal value of the shares issued are allocated to share capital with any excess being recorded as share premium. Employee benefit trust The financial statements include the assets and liabilities of a trust set up for the benefit of the Group’s employees. The employee benefit trust has acquired shares in the Company and these are deducted from the shareholders’ funds on the balance sheet at the cost of acquisition less proceeds on disposal. Use of accounting estimates and judgements Many of the amounts included in the financial statements involve the use of judgement and/or estimation. These judgements and estimates are based on management’s best knowledge of the relevant facts and circumstances, having regard to prior experience, but actual results may differ from the amounts included in the financial statements. Information about such judgements and estimation is contained in the accounting policies and/or the notes to the financial statements and the key areas are summarised below: Judgements in applying accounting policies a) Capitalisation of development costs requires analysis of the technical feasibility and commercial viability of the project concerned. Capitalisation of the costs will be made only where there is evidence that an economic benefit will accrue to the Group. To date no development costs have been capitalised and all costs have been expensed in the Income statement as research and development expenditure, £3.0m (2013: £2.5m) b) The Directors assume that the convertible loan note will be repayable in September 2014 rather than any earlier date nominated by the note holder. Repayment of the principal has been treated as not substantive as the repayment of principal and reinvestment in equity are viewed as occurring at the same time in contemplation of one another. c) Where the Group sells to distributors at initially low margin and there is further consideration receivable by the group, this deferred consideration forms part of the fair valuation of consideration receivable by the Group for goods supplied. In these instances the deferred consideration is accrued at a discounted value at the point of delivery. The directors considered the following points in applying this accounting treatment: Although a significant portion of the sales price is received upon a further sale to an end customer, substantially all the risks and rewards of ownership are passed to the distributor when the goods are shipped, and the distributor is acting as principal (not merely as agent) when arranging to resell the goods. The directors have reached this conclusion because; i. The group does not have any continued managerial involvement in the distributor’s onward sale of goods; ii. The distributor does not have the right to return any goods. 83 © Allergy Therapeutics plcwww.allergytherapeutics.com More information on the reasoning behind the treatment of sales to distributors can be found in the ‘Sale of goods’ accounting policy description. Sources of estimation uncertainty a) Depreciation rates are based on estimates of the useful lives and residual values of the assets involved. There is inherent uncertainty in the useful lives of assets, which means that they are constantly reviewed by management (Accounting policies note (page 73) and note 16). b) Estimates of future profitability are required for the decision whether or not to carry forward a deferred tax asset. (Note 12). c) Determining whether goodwill is impaired requires an estimation of the value in use of the cash generating unit to which the goodwill has been allocated. This value in use calculation requires an estimation of the future cash flows expected to arise from the cash generating unit and a suitable discount rate in order to calculate the present value. d) The Group has been awarded a provisional exemption to the increased rebate charge in Germany for the period July to December 2012. Revenue of £1.1m has been accrued in relation to this exemption. During the year £0.6m has been collected with £0.5m remaining to be collected. While the Group is confident that the exemption will be confirmed, there is a possibility that this will not happen. e) Inventory standard costs are reviewed regularly in order to ensure relevant measures of utilisation, production lead time and appropriate levels of manufacturing expense are reflected in the standards. As part of the continuous refinement of standard costs, in July 2013 a new cost set was applied in which an increased proportion of manufacturing cost was absorbed by intermediate processes (rather than finishing processes) as this more accurately reflects the conversion cost of inventory. This resulted in an increased value of inventory at 30 June 2014 of £0.5m. If this allocation method had been used in the prior year, inventory would have increased by approximately £0.5m. f) In relation to the accrued additional revenue due from distributors referred to in the Judgements section (point (c) above); there is some uncertainty that the additional revenue will crystallise as it is dependent on a further sale by the distributor. The directors consider that the additional consideration can be measured reliably because it is based on a fixed list price, and our past experience indicates that the distributor will sell the vaccines. The directors have assessed that the deferred consideration of £0.2m is recoverable and will crystallise in future periods and has been carried forward in prepayments and accrued income (2013: £0.1m). 3. REVENUE An analysis of revenue by category is set out in the table below: Sale of goods Rendering of services 2014 £’000 41,871 84 41,955 2013 £’000 38,295 984 39,279 Rendering of services relates to the supply of services to a new distributor in the prior year to assist them in setting up operations in their territory. 4. SEGMENTAL REPORTING The Group’s operating segments are reported based on the financial information provided to the Executive Directors, who are defined as the Chief Operating Decision-Maker (CODM), to enable them to allocate resources and make strategic decisions. The CODM reviews information based on geographical market sectors and assesses performance at an EBITDA (operating profit before interest, tax, depreciation and amortisation) and operating profit level. Management have identified that the reportable 84 © Allergy Therapeutics plcwww.allergytherapeutics.comsegments are Central Europe (which includes the following operating segments; Germany, Austria, Switzerland and the Netherlands), Southern Europe (Italy and Spain), the UK (including Latin America) and Rest of World. Revenue by segment Central Europe Germany Other Southern Europe UK Rest of World Revenue from External Customers 2014 £’000 25,782 5,902 31,684 6,718 927 2,626 Inter Segment Revenue 2014 £’000 34,890 41,955 34,890 Total Segment Revenue Revenue from External Customers 2014 £’000 25,782 5,902 31,684 6,718 35,817 2,626 76,845 2013 £’000 23,613 5,143 28,756 5,774 881 3,868 Inter Segment Revenue 2013 £’000 32,081 Total Segment Revenue 2013 £’000 23,613 5,143 28,756 5,774 32,962 3,868 71,360 39,279 32,081 Revenues from external customers in all segments are derived principally from the sale of a range of pharmaceutical products designed for the immunological treatment of the allergic condition. Rest of World revenues include sales through distributors and agents in several markets including Czech and Slovak Republics, Canada and South Korea. These include rendering of services revenues (note 3). Inter-segment revenues represent sales of product from the UK to the operating subsidiaries. The price is set on an arms-length basis which is eliminated on consolidation. The CODM also reviews revenue by segment on a constant currency basis to provide relevant year on year comparisons. The following revenue table is based on a constant currency rate of € 1.20: £1.00 which was the rate used in the 2014 budget. Central Europe Germany Other Southern Europe UK Other Revenue from External Customers Revenue from External Customers 2014 £’000 25,198 5,545 30,743 6,565 927 2,626 2013 £’000 24,442 5,157 29,599 5,977 881 3,866 40,861 40,323 The Group has no customers which individually account for more than 10% of the Group’s revenue. 85 © Allergy Therapeutics plcwww.allergytherapeutics.comDepreciation and amortisation by segment Central Europe Southern Europe UK EBITDA by segment Allocated EBITDA Central Europe Southern Europe UK Allocated EBITDA 2014 £’000 154 105 1,028 1,287 2014 £’000 (810) (236) 3,542 2,496 2013 £’000 199 86 1,057 1,342 2013 £’000 (791) (323) 3,124 2,010 Depreciation and amortisation (1,287) (1,342) Operating profit Finance income Finance expense Profit before tax Total assets by segment Central Europe Southern Europe UK Inter-segment assets Inter-segment investments Total assets per Balance Sheet 1,209 170 (295) 1,084 2014 £’000 8,489 3,608 37,626 49,723 (2,572) (18,753) 28,398 668 110 (249) 529 2013 £’000 9,306 4,117 37,038 50,461 (3,126) (18,371) 28,964 Included within Central Europe are non-current assets to the value of £2,480,000 (2013: £2,560,000) relating to Goodwill and within Southern Europe assets to the value of £1,085,000 (2013: £1,207,000) relating to freehold land and buildings. 86 © Allergy Therapeutics plcwww.allergytherapeutics.comTotal liabilities by segment Central Europe Southern Europe UK Inter-segment liabilities Total liabilities per Balance Sheet 5. PROFIT BEFORE TAX Profit for the period has been arrived at after charging: Foreign exchange gain/(loss) Depreciation and amortisation: Depreciation of property plant and equipment (note 16) Amortisation of intangible assets (note 15) 2014 £’000 (9,932) (1,861) (4,101) (15,894) 2,571 2013 £’000 (10,070) (2,518) (4,831) (17,419) 3,126 (13,323) (14,293) 2014 £’000 66 1,006 281 2013 £’000 350 968 374 Research and development 2,963 2,535 Land and buildings held under operating leases Other operating leases Audit and non-audit services: Fees payable to the Company’s auditor for the audit of the Group accounts Fees payable to the Company’s auditor and its associates for other services: The audit of the Company’s subsidiaries pursuant to legislation Tax services Other services pursuant to legislation 726 584 22 74 10 9 422 521 22 69 20 23 Share based payment expense (note 28) 184 183 87 © Allergy Therapeutics plcwww.allergytherapeutics.com6. REMUNERATION OF KEY MANAGEMENT PERSONNEL Salaries and short-term employee benefits Social security costs Post employment benefits – defined contribution plans Over accrual of bonuses Share based payment 2014 £’000 680 69 50 799 - 48 847 2013 £’000 597 66 75 738 (35) 29 732 Key management personnel are considered to be the Directors and full details of their remuneration are set out in the audited information included in the Director’s Remuneration Report on pages 54 to 56 and forms part of the financial statements. 7. EMPLOYEES (including directors) Wages and salaries Social security costs Share based payments Pension costs – defined benefit plans Pension costs – defined contribution plans 2014 £’000 15,497 2,264 184 262 237 2013 £’000 14,292 2,110 158 243 267 18,444 17,070 The average number of employees during the period (including executive directors) was made up as follows: 2014 116 93 138 347 2014 £’000 76 2013 113 91 147 351 2013 £’000 - R & D, marketing and administration Sales Production 8. OTHER INCOME Net monetary value of above the line R&D tax credit 88 © Allergy Therapeutics plcwww.allergytherapeutics.com9. FINANCE EXPENSE Interest on borrowing facility Change in fair value of derivative financial instrument Net interest expenses on defined benefit liability Other interest and charges 10. FINANCE INCOME Bank interest Interest on investment assets Other finance income Other finance income relates to the unwinding of the discount on accrued revenue. 11. INCOME TAX EXPENSE Current Tax: Prior period tax Overseas tax Deferred tax – current year Tax charge/ (credit) for the period 2014 2013 As restated £’000 39 (13) 206 63 295 £’000 167 (149) 187 44 249 2014 2013 As restated £’000 £’000 5 99 66 170 2014 £’000 110 219 329 14 343 19 91 - 110 2013 £’000 (57) 166 109 (213) (104) 89 © Allergy Therapeutics plcwww.allergytherapeutics.comThe tax charge assessed for the period is higher than the standard rate of corporation tax as applied in the respective trading domains where the Group operates. The differences are explained below: 2014 2013 As restated Profit for the period before tax Profit for period multiplied by the respective standard rate of corporation tax applicable in each domain (average 22.50%, 2013: 23.75%). Effects of: Disallowable adjustments Movements in unrecognised deferred tax Allowances for R&D expenditure Adjustment of taxes for prior periods Adjustment for different tax rates Relief for shares acquired by employees and Directors Gross up of R&D expenditure credit Deferred tax - deferred tax release - change in tax rate Tax charge/(credit) for the period £’000 1,084 244 200 (268) - 110 27 - 4 317 - 26 343 The income tax credit for 2013 is re-stated so as to include movements in unrecognised deferred tax and adjustments for the implementation of IAS19 (revised). 12. DEFERRED TAX Recognised deferred tax liability 2014 2014 2014 2014 2013 2013 2013 Tax value of carried forward losses Tax value of accelerated capital allowances Acquisition of Teomed AG Total Tax value of carried forward losses Tax value of accelerated capital allowances Acquisition of Teomed AG £’000 529 126 392 (276) (48) (57) (14) (27) - 96 (200) - (104) 2013 Total At 1 July Amount credited to the income statement Exchange differences At 30 June £’000 671 (71) - 600 £’000 (471) 45 - (426) £’000 £’000 £’000 £’000 £’000 £’000 (159) 41 - - (165) (165) 12 (14) 671 (471) 11 (136) 11 38 - 671 - (471) (159) (41) 13 (7) 213 (7) Deferred tax is provided under the balance sheet liability method using the local tax rate for the overseas difference. Deferred tax assets and deferred tax liabilities are offset where the Group has a legally enforceable right to do so and when the deferred tax assets and liabilities relate to tax levied by the same tax authority and where there is an intention to settle the balances on a net basis. 90 © Allergy Therapeutics plcwww.allergytherapeutics.comThe following is the analysis of the deferred tax balances after offset for financial reporting purposes: Deferred tax assets Deferred tax liabilities Unrecognised deferred tax Non Current Assets Property, plant & equipment R&D expenditure credit Current Assets Stock Derivative financial instruments Current Liabilities Derivative financial instruments Non Current Liabilities Pension and other employee obligations Derivative financial instruments Share options Unused tax losses Total 2014 £’000 174 (136) 38 2013 £’000 200 (159) 41 2014 2014 2013 2013 Deferred tax Deferred tax assets £’000 liabilities £’000 Deferred tax assets Deferred tax liabilities £’000 £’000 51 22 418 69 - 1,057 - 72 12,778 14,467 - - - - - - - - - - - - 402 - 72 1,040 3 131 15,023 16,671 - - - - - - - - - - As at 30 June 2014 the Group had approximately £66m of unutilised tax losses (2013: approximately £69m) available for offset against future profits. A deferred tax asset has been recognised in respect of £3.0m (2013 £2.9m) of such losses, the recovery of which is supported by the expected level of future profits of the Group. Substantially all the tax losses have no fixed expiry date. The main UK corporation tax rate is to change from 21% to 20% with effect from 1 April 2015. The recognised and unrecognised deferred tax assets have been calculated at 20%, being the rate enacted at 30 June 2014. 91 © Allergy Therapeutics plcwww.allergytherapeutics.com13. EARNINGS PER SHARE 2014 2013 Profit after tax attributable to equity shareholders Issued ordinary shares at start of the period Ordinary shares issued in the period Issued ordinary shares at end of the period Ordinary shares to be issued on conversion of loan note (Note 27) Ordinary shares used in EPS calculation Weighted average number of shares for the period Potentially dilutive share options under Group’s share option scheme Weighted average number of shares for diluted earnings per share Basic earnings per share (pence) Diluted earnings per share (pence) £’000 741 Shares ‘000 409,867 - 409,867 41,675 451,542 451,542 19,965 471,507 0.16p 0.16p As restated £’000 633 Shares ‘000 406,913 2,954 409,867 41,675 451,542 453,017 18,635 471,652 0.14p 0.13p Earnings per share for 2013 is re-stated so as to include ordinary shares to be issued on conversion of the convertible loan note (Note 27) and adjustments for the implementation of IAS19 (revised). 14. GOODWILL At 1 July Exchange difference At 30 June 2014 £’000 2,560 (80) 2,480 2013 £’000 2,489 71 2,560 For the purposes of impairment testing of goodwill, the Directors recognise the Group’s Cash Generating Units (“CGU”) to be the following: Germany 2014 £’000 2,480 2013 £’000 2,560 The recoverable amount for the CGU above was determined based on a value-in-use calculation, covering a detailed three-year forecast of future cash flows using budgeted projections assuming a 12.7% discount rate (2013: 12.7%) which the Group has estimated to be the weighted average cost of capital adjusted for risks specific to the CGU. Management’s key assumptions include sales growth (at an average of 4% for the three year period), which has been determined based on past experience in this market. The Group’s management believes that this is the best available input for forecasting this mature market. 92 © Allergy Therapeutics plcwww.allergytherapeutics.comApart from the considerations described in determining the value in use of the CGU described above, the Group’s management is not currently aware of any other probable changes that would necessitate changes in its key estimates. There are no reasonable possible changes in the assumptions that could lead to an impairment being recorded. Manufacturing know-how Non-competing know-how Distribution agreements (Switzerland) Other intangibles Computer software Total £’000 £’000 £’000 £’000 £’000 £’000 1,000 3,467 960 1,773 1,884 9,084 15. INTANGIBLE ASSETS Cost At 1 July 2012 Additions Asset reclassification Disposals Foreign exchange - - - - At 30 June 2013 1,000 Additions Disposals Foreign exchange - - - At 30 June 2014 1,000 Amortisation At 1 July 2012 Disposals Charge for the year Foreign exchange 933 - 67 - At 30 June 2013 1,000 Disposals Charge for the year Foreign exchange - - - At 30 June 2014 1,000 Net book value At 1 July 2012 At 30 June 2013 At 30 June 2014 67 - - - - - 183 3,650 - - (200) 3,450 3,467 - - 183 3,650 - - (200) 3,450 - - - - - - 36 996 - - (52) 944 128 66 5 199 - 68 (10) 257 832 797 687 - - (684) 20 157 11 - 42 157 11 (684) 281 1,109 2,094 8,849 16 (229) (18) 878 994 (84) 107 10 1027 (229) 46 (17) 827 779 82 51 256 (81) (43) 272 (310) (313) 2,226 8,498 1,455 6,977 - 134 34 1,623 (81) 167 (36) 1,673 (84) 374 232 7,499 (310) 281 (263) 7,207 429 471 553 2,107 1,350 1,291 The class of Intangible Assets “Distribution agreements” arose from the acquisition of the Swiss Subsidiary, Teomed AG on 1 July 2010. These distribution agreements represent the present value of the future cashflows expected to arise from the agreements and are amortised over a period of fifteen years. Other intangibles relate to trademarks and licences. 93 © Allergy Therapeutics plcwww.allergytherapeutics.com16. PROPERTY, PLANT AND EQUIPMENT Plant & machinery Fixtures & fittings Motor vehicles Computer equipment Freehold land & buildings Total £’000 £’000 £’000 £’000 £’000 £’000 7,646 4,782 36 2,846 Cost or valuation At 1 July 2012 Revaluation Additions Asset reclassification* Foreign exchange Disposals - 343 - 10 - - 177 - 38 (8) At 30 June 2013 7,999 4,989 Additions Foreign exchange Disposals 365 (12) (51) 238 (45) (97) At 30 June 2014 8,301 5,085 Depreciation At 1 July 2012 Charge for the year Revaluation Foreign exchange Disposals 3,780 425 - 7 - 3,215 224 - 31 (2) At 30 June 2013 4,212 3,468 Charge for the year Foreign exchange Disposals 430 (9) (51) 228 (32) (97) At 30 June 2014 4,582 3,567 Net book value At 1 July 2012 At 30 June 2013 At 30 June 2014 3,866 3,787 3,719 1,567 1,521 1,518 * Assets reclassified to intangibles. - - - - - 36 6 - (4) 38 34 2 - - - 36 - - (4) 32 2 - 6 - 144 (11) 32 (2) 1,258 (128) - - 77 - 16,568 (128) 664 (11) 157 (10) 3,009 1,207 17,240 203 (42) (70) - (77) - 812 (176) (222) 3,100 1,130 17,654 1,887 275 - 25 - 2,187 303 (22) (70) 2,398 959 822 702 97 42 (145) 6 - - 45 - - 45 1,161 1,207 1,085 9,013 968 (145) 69 (2) 9,903 1,006 (63) (222) 10,624 7,555 7,337 7,030 Note 22 provides details of the assets secured against the Group’s bank borrowings. 94 © Allergy Therapeutics plcwww.allergytherapeutics.comFreehold land and buildings relates to the Group’s office and warehouse building in Milan, Italy which was revalued in July 2009 by independent valuers. This property is carried at fair value and is classified as level 3 in the hierarchy of financial assets. The reconciliation of the carrying amounts of non-financial assets classified within level 3 is as follows: Balance at 1 July 2013 Loss recognised in profit or loss – depreciation of buildings Loss recognised in other comprehensive income – exchange differences on translating foreign operations Balance at 30 June 2014 £’000 1,207 (45) (77) 1,085 The land and buildings were previously valued using the cost model and had a carrying value of £1. Fair values were estimated based on recent market transactions, which were then adjusted for specific conditions relating to the land and buildings. An interim valuation of the Land and Buildings was carried out in April 2013 by independent valuers. Land and buildings were revalued to fair value at the reporting date based on this valuation as management determined that the effect of changes in market prices between the date of valuation and reporting dates were immaterial. If the cost basis was used, the carrying amounts of the revalued land and buildings would be £1 (the carrying value of the asset at the point the subsidiary was first consolidated). The revalued amounts include a revaluation surplus of £1,298,000 before tax (of which £476,000 writes back the accumulated depreciation) which is not available for distribution to the shareholders of the Group. During the prior year, following a review of the useful lives of all assets within the classes ‘Plant and machinery’ and ‘Fixtures and fittings’, certain asset lives were extended by varying amounts, up to a maximum total useful life of 15 years. This had the effect of reducing the depreciation charge for the prior year by £480,000 against the preceding year. 17. INVESTMENTS The Group carries an insurance policy which is designed to contribute towards the obligation in respect of the German defined benefit pension scheme (see note 26). It is valued at fair value (market price) by the Group’s actuaries each year. At 1 July Additions Finance income Remeasurement of investment (Loss) /Gain on foreign exchange 2014 £’000 3,059 281 99 (10) (217) 3,212 2013 £’000 2,569 355 91 (108) 152 3,059 95 © Allergy Therapeutics plcwww.allergytherapeutics.com18. INVENTORIES Raw materials and consumables Work in progress Finished goods 2014 £’000 1,854 3,144 1,471 6,469 2013 £’000 1,895 2,273 1,846 6,014 In July 2013 a new cost set was applied in which an increased proportion of manufacturing cost was absorbed by intermediate processes (rather than finishing processes) as this more accurately reflects the conversion cost of inventory. This resulted in an increased value of inventory at 30 June 2014 of £0.5m. If this allocation method had been used in the prior year, inventory would have increased by approximately £0.5m. The cost of inventories recognised as an expense in cost of sales during the year was £11.0m (2013: £11.0m) including write-downs in the year amounting to £0.9m (2013: £1.2m). The value of inventories measured at fair value less cost to sell was £162,000 (2013: £77,000). 19. TRADE AND OTHER RECEIVABLES Trade receivables Other receivables VAT Prepayments and accrued revenue 2014 £’000 2,756 1,261 158 1,193 5,368 2013 £’000 3,129 2,158 117 1,781 7,185 Accrued revenue (£212,000) relates to deferred consideration receivable from customers (2013: £117,000) All amounts due as shown above are short-term. The carrying value of trade receivables is considered a reasonable approximation of fair value. All trade and other receivables have been reviewed for indicators of impairment. During the year, £113,000 of trade receivables was found to be impaired and £17,000 of the provision utilised. The impaired trade receivables are mostly due from private customers in the Italian market who are experiencing financial difficulties. Bad and doubtful debt provision Balance brought forward Foreign exchange adjustments Charge for the year Utilised Balance carried forward 96 2014 £’000 109 (11) 113 (17) 194 2013 £’000 54 8 152 (105) 109 © Allergy Therapeutics plcwww.allergytherapeutics.comIn addition, some of the unimpaired trade receivables are past due as at the reporting date. The age of financial assets past due but not impaired is as follows: The financial assets which were overdue but not provided for were: Trade receivables Not more than 3 months More than 3 months but not more than 6 months More than 6 months but not more than 1 year More than one year 20. CASH AND CASH IN HAND Cash at bank and in hand 21. TRADE AND OTHER PAYABLES Due within one year Trade payables Social security and other taxes Other creditors Accrued expenses and deferred income Due after more than one year Other creditors Total trade and other payables 22. BORROWINGS Due within one year Convertible loan note Overdraft 2014 £’000 626 161 44 74 905 2014 £’000 2,029 2014 £’000 2,464 591 290 3,080 6,425 73 6,498 2014 £’000 49 - 49 2013 £’000 640 456 200 99 1,395 2013 £’000 1,257 2013 £’000 3,050 536 717 2,703 7,006 - 7,006 2013 £’000 95 193 288 97 © Allergy Therapeutics plcwww.allergytherapeutics.comThe overdraft facility is provided by The Royal Bank of Scotland Plc and has a variable limit during the year up to a maximum of £4.5 million. Interest on the overdraft is at the bank’s base rate plus a fixed margin of 2.75%. The facility is secured in favour of The Royal Bank of Scotland Plc by means of debentures granted by the Company and its principal subsidiaries and share pledge agreements relating to Bencard Allergie GmbH, Allergy Therapeutics Italia SRL and Allergy Therapeutics Iberica SL. The overdraft facility is due for renewal in May 2015. The Convertible loan notes were issued in April 2012 (Note 27). The liability relates to the interest payable over the next year. 23. PROVISIONS The provision refers to a leaving indemnity reserve in Allergy Therapeutics Italia srl. Under Italian law, alongside each monthly salary payment an amount is accrued into this reserve for each employee. When the employee leaves the company the accrued amount is paid as a deferred salary payment. At 1 July Additions Utilisation Foreign exchange movement 24. FINANCIAL INSTRUMENTS Risk management 2014 £’000 300 28 (89) (17) 222 2013 £’000 274 26 (19) 19 300 The Group manages its capital to ensure that entities within the Group will be able to continue as a going concern whilst maximising the return to shareholders through the effective management of liquid resources raised through share issues and loan arrangements. Capital management objectives are met through regular reviews of cash flows, debtor/creditor balances, budgets and forecasts. Capital Total equity Borrowings Overall financing 2014 £’000 15,075 15,075 49 15,124 2013 £’000 14,671 14,671 288 14,959 Capital-to-overall financing ratio 1.00 0.98 There is no requirement by external parties to comply with any capital ratios. 98 © Allergy Therapeutics plcwww.allergytherapeutics.comThe IAS 39 categories of financial assets and liabilities included in the balance sheet and the headings under which they are shown are as follows: Categories of financial instrument Financial assets Current Loans and receivables (including cash and cash equivalents) Fair value through profit and loss – held for trading Financial liabilities Current At amortised cost (including borrowings and payables) Fair value through profit and loss – held for trading Non current At amortised cost (including borrowings and payables) Derivative financial instruments 2014 £’000 6,203 345 6,548 (2,660) - (295) (2,955) 2013 £’000 6,661 2 6,663 (3,918) (326) (300) (4,544) The Group uses derivative financial instruments to mitigate the effects of exchange rate exposure through the use of forward exchange contracts and interest rate volatility through the use of interest rate swap arrangements. The fair value of these instruments is calculated by reference to observable market rates and supported by counterparty confirmation. Interest rate swap These were arranged to convert 60% of the Company’s loan borrowings from floating to fixed rates. The loan was fully repaid in April 2012 and the swaps closed out in September 2013. Within the fair value hierarchy, this financial derivative is classified as level 2. Euro forward contracts (including Euro exchange swaps) The Group has Euro forward contracts with its bank that are arranged for the sale of €11,824,000 to purchase GBP at an average blended rate of 1.2030 for dates from August 2014 until February 2015. Within the fair value hierarchy, this financial derivative is classified as level 2. 99 © Allergy Therapeutics plcwww.allergytherapeutics.comAnalysis of derivative financial instruments Credit /(Charge) to the Income Statement Euro forward contacts - held for trading Euro forward contracts - matured in the period Interest rate swap - held for trading Interest rate swap – charges in the period 2014 £’000 656 (42) 614 13 (13) - 2013 £’000 (787) 517 (270) 149 (167) (18) Forward exchange contracts are considered by management to be part of economic hedge arrangements but have not been formally designated as such and hence hedge accounting is not used. Derivative financial instruments Current assets Derivative financial instruments - Euro forward contracts - held for trading Current liabilities Derivative financial instruments - Euro forward contracts - held for trading - Interest rate swap – held for trading 2014 £’000 2013 £’000 345 345 - - - 2 2 313 13 326 The net profit at fair value of financial instruments through the income statement is £669,000 (2013 loss: £637,000). Foreign currency risk The Group conducts most of its day to day financial activities in either the Euro (which is the functional currency of the active subsidiaries in Germany, Italy, Spain, Austria and The Netherlands), Sterling (which is the functional currency of the UK parent entity), Swiss Francs (which is the functional currency of the Swiss subsidiary) or Argentinean Pesos (which is the functional currency of the Argentine subsidiary). Some costs are denominated in US dollars and some income is denominated in Canadian dollars. The Group carries bank balances in the following currencies: Sterling Euro US dollars Canadian dollars Swiss franc Argentinean peso 100 2014 £’000 129 1,793 11 3 93 - 2013 £’000 (178) 863 6 259 113 1 2,029 1,064 © Allergy Therapeutics plcwww.allergytherapeutics.com Foreign currency denominated financial assets and liabilities, translated into Sterling at closing rates, are as follows: Sterling £’000 466 (1,494) (1,028) (73) (73) 2014 Euro £’000 5,275 (755) 4,520 (222) (222) Other £’000 807 (411) 396 - - Sterling £’000 480 (2,202) (1,722) - - 2013 Euro £’000 5,202 (1,437) 3,765 (300) (300) Other £’000 981 (605) 376 - - Current Financial assets Financial liabilities Short term exposure Non- current Financial liabilities Long term exposure The following table illustrates the sensitivity of the net result for the year and the equity of the Group with regard to its financial assets and liabilities and the Euro to Sterling exchange rate. Foreign exchange movements over the last two years have been considered and an average taken, and on this basis a 10% movement is considered to be a reasonable benchmark. For 2013, a 10% movement was also used. If Sterling had strengthened against the Euro by Effect on net results for the year Effect on other comprehensive income If Sterling had weakened against the Euro by Effect on net results for the year Effect on other comprehensive income Interest rate risk 2014 £’000 10% 1,882 (270) 1,612 2013 £’000 10% 2,051 (430) 1,621 10% 10% (2,152) (2,509) 328 525 (1,824) (1,984) The Group finances its operations through operating cashflow, equity fundraising and overdraft facilities. Interest is charged at a floating rate on the overdraft facility. The overdraft facility is tailored in a way to give flexibility to the Group. This flexibility provides the Group with a higher level of the facility in the low sales season and allows it to pay down the facility in the high sales season. The following table illustrates the sensitivity of the net result for the year and equity to possible changes in interest rates of + 1% with effect from the beginning of the year on the remaining element of borrowings. Due to the current low interest rates it is not feasible to illustrate the results were the interest rates to fall by 1%. The sensitivities are considered to be reasonable given the current market conditions and the calculations are based on the financial instruments held at each balance sheet date, all other variables being held constant. Movement in net results for the year Equity 2014 £’000 + 1% 3 - 3 2014 £’000 - 1% n/a n/a n/a 2013 £’000 + 1% 34 - 34 2013 £’000 - 1% n/a n/a n/a 101 © Allergy Therapeutics plcwww.allergytherapeutics.comCredit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. In order to minimise this risk the Group endeavours only to deal with companies which are demonstrably creditworthy and this, together with the aggregate financial exposure, is regularly monitored. The maximum exposure to credit risk is the carrying value of the debtor. Credit risk on cash and cash equivalents is considered to be small as the counterparties are all substantial banks with high credit ratings. The maximum exposure is the amount of the deposit. Liquidity risk The Group’s capital management objectives are to ensure the Group’s ability to continue as a going concern, and to provide adequate funding for its day to day operations. Management has access to funding through a bank facility and continues to have the option to raise funds from the issue of equity shares to ensure the Group remains able to meet its commitments as they fall due. The Group’s bank facility (Note 22) is due for renewal in May 2015. As at 30 June 2014 the Group’s contractual maturities are summarised as follows: Current liabilities Borrowing facility - principal Convertible loan note - interest and other charges Trade payables Other short term liabilities Derivatives Non-current liabilities Other long term liabilities 2014 £’000 2014 £’000 Within 6 months 6 to 12 months 2013 £’000 Within 6 months 2013 £’000 6 to 12 months - 49 2,611 3,763 6,423 - 6,423 2014 £’000 - - - - - - - 2014 £’000 193 - 3,630 3,376 7,199 292 7,491 2013 £’000 1 to 5 years Later than 5 years 1 to 5 years 295 295 - - 300 300 - 95 - - 95 34 129 2013 £’000 Later than 5 years - - There is no material difference between the fair values and the carrying values of these financial instruments. 25. OPERATING LEASE COMMITMENTS The following payments are due to be made on operating lease commitments: Land & Buildings Other Total 2014 £’000 745 2,013 1,203 3,961 2013 £’000 701 2,187 1,655 4,543 2014 £’000 339 307 - 646 2013 £’000 367 427 - 794 2014 £’000 1,084 2,320 1,203 4,607 2013 £’000 1,068 2,614 1,655 5,337 Within one year Two to five years Over five years 102 © Allergy Therapeutics plcwww.allergytherapeutics.comOf the operating lease commitments for the land and buildings of £3,961,000 (2013: £4,543,000), £3,254,000 relates to the UK premises (2013: £3,758,000). The production facility accounts for £2,868,000 (2013: £3,307,000) of this commitment and expires in December 2023. Premises in Spain account for £145,000 (2013: £187,000) expiring in 2020 and in Germany for £276,000 (2013: £491,000) expiring in December 2015. Of the other commitments, £492,000 (2013: £588,000) relates to leased vehicles all expiring within 5 years. 26. RETIREMENT BENEFIT OBLIGATIONS Defined contribution scheme The Group operates a defined contribution pension scheme for certain employees in the UK. The assets of the scheme are held separately from those of the Group in an independently administered fund. The amount charged against the profits represents the contributions payable under the scheme in respect of the accounting period totalling £ 237,000 (2013: £267,000). Defined benefit scheme The Group operates a partly funded non-contributory defined benefit pension scheme for certain employees in Germany. The actuarial valuation was carried out by Swiss Life Pensions Management GmbH at 30 June 2014. The major assumptions used were as follows: Retail price inflation Salary increase rate Rate of pension increase Discount rate at the beginning of the year Discount rate at the end of the year 2014 % pa 1.5 3.0 1.5 3.35 3.05 2013 % pa 1.5 3.0 1.5 4.0 3.35 Increase of social security contribution ceiling 3.0 3.0 Average life expectancies Male, 65 years of age at the balance sheet date Female, 65 years of age at the balance sheet date Male, 45 years of age at the balance sheet date Female, 45 years of age at the balance sheet date The assets in the scheme and the expected rates of return were as follows: Fair value of plan assets Present value of scheme liabilities Deficit in the scheme Experience gains on plan assets Experience gains/(losses) on plan liabilities Years Years 19.4 23.4 39.1 44.2 2014 £’000 1,335 (7,753) (6,418) 8 88 19.2 23.3 38.9 44.0 2013 £’000 1,414 (7,628) (6,214) 12 (191) 103 © Allergy Therapeutics plcwww.allergytherapeutics.comThe plan assets consist of long-term insurance policies held to cover the German pension obligation. The value of the plan assets is deducted from the value of the pension liability to give a net liability of £6,418,000 (2013: £6,214,000). The basis used to determine the net interest cost is based on the net defined benefit asset or liability and the discount rate as determined by Swiss Life Pensions Management GmbH using the projected unit credit method. The actual return on plan assets for the year is £54,000 (2013: £60,000). The pension charge generates an unrecognised deferred tax asset of £1,057,000 (2013:£1,040,000), however this is unrecognised in the Group accounts as there is uncertainty over the recoverability. Long term insurance policies that do not qualify as plan assets are recognised as separate investment assets at fair value and represent a re-imbursement right as defined by IAS 19. See note 17 for further details of these investment assets. Amounts charged to operating profit Current service costs Amounts included in other finance expenses Interest income on plan assets Interest on pension scheme liabilities Net charge Amounts recognised in other comprehensive income Actual return less expected return on pension scheme assets Experience gains/ (losses) arising on scheme liabilities Changes in assumptions underlying the present value of scheme liabilities Total amount relating to year Opening cumulative losses Remeasurement of net defined liability Net movement recognised Movement in assets during the year Balance as at 1 July Foreign currency differences Interest income on plan assets Remeasurement of net defined liability Contributions from employer Assets transferred to finance benefits paid Balance as at 30 June 104 2014 £’000 2013 As restated £’000 262 (46) 252 206 8 88 (367) (271) (2,510) (2,781) (2,781) 2014 £’000 1,414 (97) 46 8 19 (55) 1,335 243 (48) 235 187 12 (191) (692) (871) (1,645) (2,516) (2,516) 2013 £’000 1,196 97 48 12 121 (60) 1,414 © Allergy Therapeutics plcwww.allergytherapeutics.comMovement in liabilities in the year Balance as at 1 July Foreign currency differences Current service costs Interest cost Remeasurement of net defined liability Benefits paid by employer Benefits paid from assets Balance as at 30 June 2014 £’000 2013 £’000 (7,628) (5,913) 522 (262) (252) (271) 83 55 (455) (243) (235) (885) 43 60 (7,753) (7,628) The expected contributions over the forthcoming year are £57,000. The significant actuarial assumptions for the determination of the defined benefit IAS 19.173(b) obligation are the discount rate, the salary growth rate and the average life expectancy. The calculation of the net defined benefit liability is sensitive to these assumptions. The following table summarises the effects of changes in these actuarial assumptions on the defined benefit liability at 30 June 2014: Changes in the significant actuarial assumptions £’000 £’000 Discount rate Increase to 4.05% Decrease to 2.05% Increase/ (decrease) in the defined benefit liability (1,000) 1,150 Salary growth rate Increase to 4.00% Decrease to 2.00% Increase/ (decrease) in the defined benefit liability 346 (317) Average life expectancies of males Increase of one year Decrease of one year Increase/ (decrease) in the defined benefit liability 221 (218) Average life expectancies of females Increase of one year Decrease of one year Increase/ (decrease) in the defined benefit liability 255 (256) 105 © Allergy Therapeutics plcwww.allergytherapeutics.com27. ISSUED SHARE CAPITAL Authorised share capital Ordinary shares of 0.10p each 1 July and 30 June Deferred shares of 0.10p each 1 July and 30 June Issued and fully paid Ordinary shares of 0.10p At 1 July Issued during the year At 30 June Issued and fully paid Deferred shares of 0.10p At 1 July Issued during the year At 30 June Issued share capital 2014 Shares 2014 £’000 2013 Shares 2013 £’000 790,151,667 9,848,333 409,866,831 - 409,866,831 9,848,333 - 9,848,333 419,715,164 790 10 410 - 410 10 - 10 790,151,667 9,848,333 406,912,981 2,953,850 409,866,831 9,848,333 - 9,848,333 420 419,715,164 790 10 407 3 410 10 - 10 420 The deferred shares have no voting rights, dividend rights or value attached to them. No share options were exercised in the year (2013: Share options exercised with proceeds of £148,000). In April 2012, Allergy Therapeutics plc issued a convertible loan note to a major investor, CFR Pharmaceuticals SA (CFR). The loan agreement stated that the loan of £4,042,469 would be repaid on 20 April 2014 or an earlier date advised by the note holder (with at least 15 business days’ notice). On the repayment date, the loan had to be repaid and on the same date the note holder had to purchase 41,674,938 shares at a fixed price of 9.7p per share. Interest is payable at a rate of 3% per annum during the term of the notes. The Directors concluded that the repayment of the principal and the mandatory investment were linked such that in substance this represents the conversion of the loan into a fixed number of shares, and hence the loan note was split into a liability and an equity component. The liability component of £222,000 represented the present value of the interest payments on the loan, with the balance of £3,820,000 treated as equity. In April 2014, CFR and Allergy Therapeutics plc mutually agreed to amend the agreement to defer the repayment date until 30 September 2014. The only substantive effect of this amendment was the agreement to pay further interest of £49,000 over the remaining period of the loan. This is effectively a loss on the remeasurement of the debt. As this was incurred with an equity shareholder, it was treated as a transaction with owners and dealt with directly in the statement of changes in equity; with Allergy Therapeutics plc recognising a corresponding further liability of £49,000 within current liabilities. 106 © Allergy Therapeutics plcwww.allergytherapeutics.com28. SHARE BASED PAYMENTS The Group has a Long Term Incentive Plan (‘LTIP’) under which Executive Directors and senior employees may receive an annual provisional award of performance vesting shares. The Group has two plans: the initial 2005 Plan and the 2013 Plan. The 2013 LTIP plan was adopted by the Board on 20 March 2013, the Board having consulted major shareholders. Awards were made under the new 2013 plan during the year. Under the 2005 Plan the number of shares that vest depends on the Group’s performance during the Plan cycle in terms of total shareholder return (TSR) compared to the TSR performance of the companies in the Plan’s peer group. If the Group’s position in the peer group at the end of the Plan cycle is at or above the 75th percentile, 100% of the shares provisionally awarded may vest; between the 75th and 50th percentile the percentage of shares that may vest will be calculated on a straight-line basis between 100% and 33.33%; below the 50th percentile no shares will vest. Each Plan cycle will comprise not less than three consecutive financial years. Awards are forfeited if the employee leaves the Group before the shares vest. For the 2013 Plan, performance criteria for each award are set by the remuneration committee. The 2013 award is based on the total shareholder return (“TSR”). An award shall vest at 100% if at the end of the plan cycle the maximum TSR of 25% has been satisfied. If the TSR is less than 10% only 25% shares shall be distributed. If the TSR is between 10% and 25% share distributions will be on a straight line basis between 25% and 100% of the initial award. Each plan cycle will comprise a period of three years. An award will be forfeited if the employee leaves the Group before the shares vest. For awards under the 2013 Plan during the year, the performance criteria are based on a combination of TSR and adjusted earnings growth. Share options were granted to employees and Directors under earlier schemes. The vesting periods are usually from one to three years. The vesting of some options is dependent on the Group’s TSR performance as for the LTIP Plans detailed above. The options are settled in equity once exercised. If the options remain unexercised after a period of 10 years from the date of the grant, the options expire. Options are forfeited if the employee leaves the Group before the options vest. During the prior year two LTIP grants were provisionally awarded. The first of these grants was awarded under the 2005 Plan and the second under the 2013 Plan which was awarded in May 2013. The latest grant, in May 2014, was awarded under the 2013 Plan. For the following outstanding share options disclosure, LTIP awards (which have a nil exercise price) have been disclosed separately to avoid distorting the weighted average exercise price (WAEP): 2014 WAEP 2013 WAEP Number Price (£) Number Price (£) Outstanding at the beginning of the year 1,152,583 0.23 Granted during the year Exercised during the year Forfeited during the year Outstanding at the year end Exercisable at the year end - - (271,478) 881,105 881,105 - - 0.44 0.17 0.17 2,468,490 2,050,000 (2,953,850) (412,057) 1,152,583 1,152,583 0.16 0.07 0.05 0.33 0.23 0.23 No options were exercised during the year (2013: weighted average share price at the date of exercise was 12p). 107 © Allergy Therapeutics plcwww.allergytherapeutics.comThe share options outstanding at the end of the year detailed above have a weighted average remaining contractual life of 3.3 years (2013: 4.3 years) and have the following range of exercise prices: Exercise price (p) 6-45 46-120 30 June 2014 30 June 2013 Number 852,539 28,566 881,105 Number 1,124,017 28,566 1,152,583 Outstanding shares provisionally awarded under the Long Term Incentive Plan, with a nil exercise price, are as follows: Outstanding at the beginning of the year Awarded during the year Forfeited during the year Outstanding at the year end 2014 Number 2013 Number 17,482,500 10,787,000 6,337,500 10,802,500 (4,707,500) 19,112,500 (4,107,000) 17,482,500 The fair value of the Long Term Incentive Plan shares has been arrived at using the share price at the date of grant and applying a vesting probability for the market performance conditions. The assumptions made to value shares awarded were as follows: Date of grant Plan cycle (yrs) End of plan cycle Expected life (yrs) Exercise price (£) Share price at grant (£) Fair value (£) Number outstanding Probability of meeting performance tests (%) 19/05/14 10/05/13 20/12/12 14/12/11 3 3 3 3 25/03/17* 25/03/16* 30/06/15* 30/06/14* 3 3 3 3 0.0000 0.0000 0.0000 0.0000 0.205 0.101 0.118 0.106 31.7 33.5 34.9 41.5 0.075 6,337,500 0.042 5,755,000 0.049 3,780,000 0.044 3,240,000 *Estimated release date of interim results. The share-based payment charge assumes an employee attrition rate of 5% per annum. In addition to the above employee related awards, in the prior year the Group also awarded options for 650,000 shares with an exercise price of £0.124 as payment to a third party advisor which are still outstanding at 30 June 2014. The Group recognised total expenses of £184,000 (2013: £183,000) related to equity-settled share based payment transactions during the year. 29. CONTINGENT LIABILITIES Allergy Therapeutics (UK) Ltd, a subsidiary of Allergy Therapeutics plc, has guaranteed the deposits required for leases on cars and rented office space of Bencard Allergie GmbH. The amount as at 30 June 2014 was €107,426; £85,996 (2013: €107,426; £91,833). 108 © Allergy Therapeutics plcwww.allergytherapeutics.comA cross-guarantee exists between Allergy Therapeutics (Holdings) Ltd, Allergy Therapeutics (UK) Ltd, Bencard Allergie GmbH, Allergy Therapeutics Italia srl. and Allergy Therapeutics Iberica SL. in which the liabilities of each entity to the Royal Bank of Scotland Plc are guaranteed by all the others. The European Commission is carrying out an investigation into whether the exemption of pharmaceutical manufacturers from the increase in rebates in Germany constitutes state aid. If it is eventually concluded that the exemptions constitute state aid, then all unlawful aid may have to be repaid. On the balance of probabilities, the Group does not consider that it will have to repay any rebate exemptions. However, should a repayment be required, then the maximum amount to be repaid would be approximately £5 million. Included in other receivables is an amount of £0.5 million (2013: £1.5 million) in respect of exempted rebates which the Group continues to collect. 30. CAPITAL COMMITMENTS The Group’s capital commitments at the end of the financial period, for which no provision has been made, are as follows: Capital commitments 30 June 2014 30 June 2013 £’000 221 £’000 459 Included in the above is £56,000 for ongoing factory refurbishments in the UK (2013: £22,000); £65,000 for new plant and machinery (2013: £156,000) and £100,000 for IT equipment and systems upgrades (2013: £281,000). 31. RELATED PARTY TRANSACTIONS AND ULTIMATE CONTROL Allergy Therapeutics plc’s related parties include its subsidiary companies and its key management. Key management personnel are the Company’s Directors, and as such full disclosure of their remuneration can be found in the Directors’ Remuneration report on pages 54 to 56. At 30 June 2014, the Company’s subsidiary undertakings were: Subsidiary undertaking Country of incorporation Principal activity Percentage of shares held Allergy Therapeutics (Holdings) Ltd Allergy Therapeutics (UK) Ltd Pharma Contract Manufacturing Solutions Ltd UK UK UK Holding Company Manufacture and sale of pharmaceutical products Manufacture and sale of pharmaceutical products Bencard Allergie GmbH Germany Sale of pharmaceutical products Bencard Allergie (Austria) GmbH Austria Sale of pharmaceutical products Allergy Therapeutics Italia s.r.l. Italy Sale of pharmaceutical products Allergy Therapeutics Iberica S.L. Spain Sale of pharmaceutical products Teomed A.G. Switzerland Sale of pharmaceutical products Allergy Therapeutics Netherlands BV Netherlands Sale of pharmaceutical products Allergy Therapeutics Argentina S.A. Argentina Marketing of pharmaceutical products Bencard Allergy Therapeutics Unipessoal LDA Portugal Sale of pharmaceutical products 100 100 100 100 100 100 100 100 100 100 100 Class of shares held Ordinary and deferred Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 109 © Allergy Therapeutics plcwww.allergytherapeutics.comDuring the year, Group companies entered into the following transactions with related parties that are not members of the Group: Related Party Sales of goods Amounts owed by/(to) related parties Laboratorios Synthesis S.A.S. Gynopharm de Venezuela C.A. Laboratorio Internacional Argentino S.A. Total 2014 £’000 2013 £’000 11 - 43 54 13 28 9 50 2014 £’000 (67) (60) 17 (110) 2013 £’000 (33) (4) 3 (34) Laboratorios Synthesis S.A.S., Gynopharm de Venezuela C.A. and Laboratorio Internacional Argentino S.A. are wholly-owned subsidiaries of CFR Pharmaceuticals SA. CFR Pharmaceuticals SA is a major investor in Allergy Therapeutics plc. As at 30 June 2014, and 30 June 2013, the Directors consider the controlling party in Allergy Therapeutics plc to be CFR Pharmaceuticals SA. The Group’s results are not consolidated by CFR Pharmaceuticals SA. Sales of goods to related parties were made on normal commercial terms. The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. No provisions have been made for doubtful debts in respect of the amounts owed by related parties. 110 © Allergy Therapeutics plcwww.allergytherapeutics.comIndependent Auditors Report to the Members of Allergy Therapeutics PLC (Company) We have audited the parent company financial statements of Allergy Therapeutics Plc for the year ended 30 June 2014 which comprise the parent company balance sheet and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 50, the directors are responsible for the preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the parent company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/apb/scope/private.cfm. Opinion on financial statements In our opinion the parent company financial statements: • • • give a true and fair view of the state of the company’s affairs as at 30 June 2014; have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and Directors’ Report for the financial year for which the financial statements are prepared is consistent with the parent company financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • • the parent company financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Other matter We have reported separately on the group financial statements of Allergy Therapeutics Plc for the year ended 30 June 2014. Christian Heeger Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Gatwick 19 September 2014 111 © Allergy Therapeutics plcwww.allergytherapeutics.comCompany Balance Sheet Fixed assets Investments Current assets Debtors: amounts falling due within one year Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Net assets Capital and reserves Called up share capital Share premium account Other reserves – Convertible loan note Other reserves – EBT Other reserves – share based payments Profit and loss account Total equity 30 June 30 June 2014 £’000 2013 £’000 Note 3 4 5 6 7 7 7 7 7 1,270 1,300 323 305 (78) (134) 245 171 1,515 1,471 1,515 1,471 420 67,716 3,652 67 465 420 67,716 3,652 67 679 (70,805) (71,063) 1,515 1,471 These financial statements were approved by the Board of Directors on 19 September 2014 and were signed on its behalf by Manuel Llobet Chief Executive Officer Registered number: 05141592 Ian Postlethwaite Finance Director 112 © Allergy Therapeutics plcwww.allergytherapeutics.com Notes to Company Balance Sheet 1. ACCOUNTING POLICIES Basis of preparation The separate financial statements of the Company are presented as required by the Companies Act 2006. As permitted by that Act, the separate financial statements have been prepared in accordance with applicable United Kingdom accounting standards and under the historical cost convention. Going Concern For the fifth year running, the Group has reported an operating profit. However, for the financial years ended 2007 to 2009 primarily as a consequence of its investment in research and development activities, it reported losses. These losses have been funded by equity issues, debt facilities and cash generated by the operating business. The Group has prepared detailed budgets, including cash flow projections, for the periods ending 30 June 2015 and 30 June 2016. These projections include assumptions on the trading performance of the operating business and the continued availability of the existing overdraft. After making appropriate enquiries, which included a review of the annual budget, by considering the cash flow requirements for the foreseeable future and the effects of sales and other sensitivities on the Group’s funding plans, the Directors continue to believe that the Group and Company will have adequate resources to continue in operational existence for the foreseeable future and accordingly have applied the going concern principle in drawing up the financial statements. In reaching this view, the Directors have considered and prioritised the actions that could be taken to offset the impact of any shortfall in operating performance. Investments Investments in shares in subsidiary undertakings are included at cost less amounts written off. Foreign currencies Transactions in foreign currencies are recorded using an average exchange rate for the period. Monetary assets and liabilities denominated in foreign currencies are translated using the rate of exchange ruling at the balance sheet date and the gains or losses on translation are included in the income statement account. Deferred taxation Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events have occurred at that date that will result in an obligation to pay more, or a right to pay less, tax. Deferred tax assets are recognised only to the extent that the directors consider that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which timing differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date. Employee Benefit Trust (EBT) The financial statements include the assets and liabilities of a trust, set up for the benefit of the Company’s employees. The Employee Benefit Trust has acquired shares in the Company and these are deducted from shareholders funds on the balance sheet within ‘Other reserves’ initially at the cost that the shares were acquired. The net proceeds received from the issue of these shares through the exercise of options are recognised through this reserve. There are no shares remaining in the EBT. Share based payments The Company has adopted the amendment to FRS 20 (Group cash-settled share based payment transactions). 113 © Allergy Therapeutics plcwww.allergytherapeutics.com The Company has equity-settled share based payments but no cash-settled share based payments. All share based payment awards granted after 7 November 2002 which had not vested prior to 1 July 2006 are recognised in the financial statements of the subsidiary which receives the goods or service from the supplier (including employees), however the share based payment reserve remains in the Company’s financial statements. Share based payments made in respect of the Company’s shares to employees of its subsidiaries are reported as an increase in investment. All goods and services received in exchange for the grant of any share-based payment are measured at their fair values. Where employees are rewarded using share-based payments, the fair values of employees’ services are determined indirectly by reference to the fair value of the instrument granted to the employee. This fair value is appraised at the grant date and excludes the impact of non-market vesting conditions (for example, profitability and sales growth targets). If vesting periods or non-market based vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of share options expected to vest. Estimates are revised subsequently if there is any indication that the number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognised in the current period. If market based vesting conditions apply, the expense is allocated over the relevant period, usually the period over which performance is measured. Vesting assumptions and resulting expenses are fixed at the date of grant, regardless of whether market conditions are actually met. Any adjustment for options which lapse prior to vesting is recognised in the current period. Full details of the Group’s share based payments are set out in Note 28 of the consolidated financial statements. 2. Loss for the financial period The Company has taken advantage of s.408 of the Companies Act 2006 and has not included its own income statement in these financial statements. The Company’s loss for the period was £91,000 (2013: £257,000 loss). 3. Investments Cost Investment brought forward Additions Diminution in value Investment carried forward Shares in subsidiary undertaking £’000 1,300 184 (214) 1,270 The additions relate to share based payments in respect of the Company’s shares to employees of its subsidiaries. 114 © Allergy Therapeutics plcwww.allergytherapeutics.comAt 30 June 2014 the Company’s subsidiary undertakings were: Subsidiary undertaking Allergy Therapeutics (Holdings) Ltd Allergy Therapeutics (UK) Ltd Pharma Contract Manufacturing Solutions Ltd Bencard Allergie GmbH Bencard Allergie (Austria) GmbH Allergy Therapeutics Italia s.r.l. Allergy Therapeutics Iberica S.L. Teomed A.G. Switzerland Allergy Therapeutics Netherlands BV Netherlands Allergy Therapeutics Argentina S.A. Argentina Bencard Allergy Therapeutics Unipessoal LDA Portugal Country of incorporation Principal activity Percentage of shares held Class of shares held UK UK UK Germany Austria Italy Spain Holding Company Manufacture and sale of pharmaceutical products Manufacture and sale of pharmaceutical products Sale of pharmaceutical products Sale of pharmaceutical products Sale of pharmaceutical products Sale of pharmaceutical products Sale of pharmaceutical products Sale of pharmaceutical products Marketing of pharmaceutical products Sale of pharmaceutical products 100 100 100 100 100 100 100 100 100 100 100 Ordinary and deferred Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Allergy Therapeutics (Holdings) Ltd is fully owned by Allergy Therapeutics plc. All other subsidiary undertakings except Bencard Allergie (Austria) GmbH and Allergy Therapeutics S.A. are fully owned by Allergy Therapeutics (Holdings) Ltd. Bencard Allergie (Austria) GmbH is fully owned by Bencard Allergie GmbH. 4. Debtors Amounts falling due within one year Amount owed by subsidiary undertakings Prepayments 30 June 2014 30 June 2013 £’000 £’000 316 7 323 298 7 305 The amount owed by subsidiary undertakings is stated net of provisions of £70,239,037 (2013: £71,139,000). 115 © Allergy Therapeutics plcwww.allergytherapeutics.com5. Creditors – amounts falling due within one year Convertible loan note interest Accruals Taxation and social security 6. Called up share capital 30 June 2014 30 June 2013 £’000 £’000 49 25 4 78 95 38 1 134 Full details of the Company’s share capital are set out in Note 27 of the consolidated financial statements. 7. Reserves At 30 June 2013 and 2014 At 30 June 2013 and 2014 At 30 June 2013 and 2014 At 30 June 2013 Provision in year for share based payments Lapsed share based payments transferred from retained losses At 30 June 2014 Share premium account £’000 67,716 Other reserve – Convertible Loan Note £’000 3,652 Other reserve – EBT £’000 67 Other reserve – share based payments £’000 679 184 (398) 465 116 © Allergy Therapeutics plcwww.allergytherapeutics.comAt 30 June 2013 Loss for the year Lapsed share based payments transferred to retained losses Distribution to shareholder – convertible loan note At 30 June 2014 8. Share based payments Profit and loss account £’000 (71,063) (91) 398 (49) (70,805) Full details of the Company’s share based payments are set out in Note 28 of the consolidated financial statements. 9. Directors’ emoluments Full details of the Company’s directors’ emoluments are set out in the Directors’ Remuneration Report on pages 54 to 56. 10. Reconciliation of movement in shareholders’ funds Loss for the financial year Share based payments Shares Issued Distribution to shareholder – convertible loan note Net addition to shareholders’ funds Opening shareholders’ funds Closing shareholders’ funds 11. Contingent Liabilities Year to 30 June 2014 Year to 30 June 2013 £’000 (91) 184 - (49) 44 1,471 1,515 £’000 (257) 183 148 - 74 1,397 1,471 Full details of the Company’s contingent liabilities are set out in Note 29 of the consolidated financial statements. 12. Related party transactions In accordance with FRS 8 on Related Party transactions, details of transactions with the Company’s subsidiaries are not disclosed as they are included in the consolidated financial statements. The consolidated financial statements include the results of the Company. Details of other related party transactions can be found in Note 31 to the consolidated financial statements 117 © Allergy Therapeutics plcwww.allergytherapeutics.comRegistrars Capita IRG plc The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Bankers The Royal Bank of Scotland plc South East Corporate Centre Turnpike House 123 High Street Crawley West Sussex RH10 1DQ Public Relations Advisers FTI Consulting Holborn Gate 26 Southampton Buildings London WC2A 1PB Patent Attorneys D Young & Co 120 Holborn London EC1N 2DY Trademark Attorneys Hoffman Eitle Sardinia House Sardinia Street 52 Lincoln’s Inn Fields London WC2A 3LZ Arabellastrasse 4 D-81925 München Germany Shareholder Information Registered office Dominion Way Worthing West Sussex BN14 8SA Advisers Nominated Adviser and Broker Peel Hunt LLP Moor House 120 London Wall London EC2Y 5ET Auditor Grant Thornton UK LLP The Explorer Building Fleming Way Manor Royal Crawley West Sussex RH10 9GT Lawyers Reed Smith The Broadgate Tower 20 Primrose Street London EC2A 2RS Covington and Burling LLP 265 Strand London WC2R 1BH Actuary Swiss Life Pensions Management GmbH Swiss Life Gruppe Berliner Strasse 85 80805 München Germany 118 © Allergy Therapeutics plcwww.allergytherapeutics.comAllergy Therapeutics plc (Registered Company Number 05141592) Dominion Way Worthing West Sussex BN14 8SA Tel: +44 (0)1903 844720 Fax: +44 (0)1903 844726 www.allergytherapeutics.com www.pollinex.com

Continue reading text version or see original annual report in PDF format above